A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Tuesday, January 17, 2012

The Gold Must Flow

In the last thread of comments, Jaqship asked about the possibility of a future Freegold tax, a punitive tax on gold meant to intimidate regular folks and steer them away from gold, and also to capture for the collective any windfall profit coming from a gold revaluation. Jaqship, who gave me permission to use his real name, is a long-time reader and supporter named Jeffrey Schramek. Jeff has an interest in these questions because he deals in rare and valuable historic treasures including a 1935 Nobel Prize made from 23K gold. Here is his website.

Jeff is certainly not a paper bug because his savings are tied up in these rare artifacts, not in a 401(k). And it turns out that moving from hard assets into bullion is a tougher calculation than moving from paper into gold. Really big money loves hard assets with numismatic and rare value because you can transport a lot of value through time and space in a much smaller package than you can with plain bullion. Also, billionaires aren’t as concerned with profiting from revaluation as they are with simply preserving what they already have.

The coin above is a Brasher Doubloon which was recently sold by a dealer in Irvine, California for $7.4 million, the most expensive private coin sale on record. The gold content of the coin is worth around $1,300 today, so that's a numismatic premium of about 570,000%. And while premiums won't enjoy the windfall revaluation of the metal, they will likely hold their present value quite well, preserving and shuttling purchasing power in a very small package. Imagine, you could fly anywhere with that coin mixed in with the spare change in your pocket.

The point is that the questions of taxes and confiscation on plain bullion are important to someone who is already holding hard assets and considering his options. And part of Jeff's reasoning was that gold bullion would be the most likely metal to be taxed "precisely because gold is useless" to the economy. So I thought this was an important enough topic that I'd take a stab at answering his questions in a post, so that everyone can benefit and discuss these issues. Here are a few excerpts from his questions in the previous thread:

Jaqship said…

My fear is that they will at some point mess with what is left of the middle class, e.g. by imposing a punitive tax on gold sales -- to intimidate regular folk from using gold to protect themselves from HI. Maybe likewise on sales of silver and platinum, although to attack those largely- industrial metals may bring unacceptable immediate harm to real production in the economy.

-----
Given that "the Right People" control policy, what's to stop them from the proxy confiscation
of draconian tax rates in the US (enforced upon all but themselves and their friends)?

Precisely because gold is "useless", such taxation of it wouldn't put what's left of the economy at the sort of risk that such taxation of industrial metals like silver (and maybe platinum) could cause.

If so, moving much capital immediately post-Freegold into silver might be the wise course for Americans.
Am I missing something?

-----"Once the USA sees capital escape..." assumes that such escape will not be blocked for all but "the Right People" (who would be allowed to duck the harsh taxes anyway).
Italy has already introduced draconian capital controls.
The IRS and DHS may enjoy working together to crush any gold etc. Black Market that tries to emerge.

My guess is that much of US policy in recent years is driven by the aim of the Elites to stealthily reduce the masses to peonage, preferably without crashing the whole economy.
If this is right, silver (because it is so used in industry) may be the only safe haven which the Elites may hesitate to harshly tax.

-----"the large gold holders will run the country. They won't make rules that hinder themselves."

I fear they will indeed make such rules, but they'll arrange that the rules are only enforced against shrimps; just as they have been doing for the last 10+ years, e.g. against small brokerage houses (most of whom have had to fold).
(This collapse of the US system's rep for fair treatment has much to do with gold's recent rise, according to folks like Janszen.)

"... they'll be more than happy to tax silver into oblivion -- exactly *because* it is necessary for industry."

Only if they'll be OK risking the utter collapse of an already dying economy. I must admit that they may be just fine with that, but they may flinch at that extreme; they may be OK with what their handiwork will already have done to enserf the middle class.

----

Hi Jaqship,

This is a common concern, that the higher the nominal gain, the higher the tax that will be levied on that particular asset. It is sometimes called a Windfall Profit's Tax. The last time we had such a tax levied in the US was in 1980 on the oil companies. That tax was repealed in 1988 and we haven't had one since. The tax was on producers of oil since the second oil crisis of the 1970s, the Iranian Revolution, reset the price of oil from $15 in early 1979 to $37 in 1980. President Carter decided to deregulate domestic oil prices allowing the oil companies to increase production and ease the shortage. But in return for the deregulation, the government decided that the majority of the difference between production cost and price should be captured by the hungry collective.

But there are a couple of things to note here. First of all it was actually an excise tax on domestic oil and not really a profits tax. And most importantly, it was a tax on producers. I fully expect such a tax on gold producers once we see the way the Superorganism resets the price of gold far above the cost of production. But to see why this will NOT be the case for private gold—gold which has already been mined and is now held in private ownership—you must try to understand why and for what purposethe human Superorganism is revaluing physical gold.

There is a purpose for highly valued gold in Freegold. It has everything to do with the savers (net-producers) in the economy, and little to do with mining companies. Miners will become tools for the state, much like the printing press is a tool today. Only the gold already in the hands of savers will be revalued to the benefit of private parties. Gold in the ground will be viewed much like oil in the ground in 1980. As it comes out of the ground most of the substantial difference between production cost and price will be captured by the hungry collective. But before we talk about windfall taxes on gold savings, there's something you really need to understand.

The Gold Must Flow

The bottom line is that private gold needs to flow as a fertile member of the balance of trade. There will be no advantage for the USG to confiscate or tax above-ground gold this time. Gold may be utterly "useless" to the present debt-based economy, but it will be absolutely vital in the Freegold economy. (Here's a comment I wrote last April about the importance of privately held gold.) This seems incomprehensible when viewed from within the current paradigm which is why you must try to put yourself in the next one to see what I'm talking about. I can try to help you see what I see. It's not easy to explain, but I'll certainly give it a valiant effort once again.

Here's the way to look at it. Today the US is running a trade deficit of 21%. We import $2.34T worth of goods and services but we only export $1.84T for a deficit of $500B or 21%. What this means is that we pay for only 79% of our imports with goods and services in return. The other 21% we borrow and then consume. Every day, every month, every year, we are borrowing and then consuming 21% of our imports. And even though the private sector has cut back on its consumption since 2008, government sponsored consumption has increased so the total hasn't changed much. And 21% is about the average for the last 30 years.

All those goods and services that we borrowed and consumed for decades on end can never be paid back. And they never will be paid back. This is a certainty. But that doesn't mean it will continue. And that's what this paradigm shift is all about. That's why the Superorganism is revaluing physical gold. So that the gold can flow along with all the other goods and services in payment for imports.

We do export gold even today. US gold exports flow primarily to London, Switzerland and India for reasons that should be apparent. But the way gold is traded on the markets today sterilizes it in terms of globally moderating and regulating the delicate balance of trade. Gold is still traded in terms of debt, or paper promises of future gold. Gold debt. This is what goes out most of the time, and any kind of international debt only increases imbalances while actually reversing the spur and brake forces a physical-only gold market would otherwise exert.

It's kind of like if you built a car where the accelerator and brake pedal functions were reversed. It would be really hard to drive that car without eventually wrecking it if every time you needed to brake you accelerated, and when you needed to accelerate you came to a stop.

Imagine that Germany is shipping more goods to London than it is getting in return. So Germany is supporting London's trade deficit in the same way that China is supporting ours. Germany is letting London "borrow" extra goods and then consume them. In exchange, let's imagine that London pays for its trade deficit with paper gold, just like the US pays China with US Treasury debt. Germany will start stacking the paper gold in the same way that China stacks Treasuries. The debt will grow. The imbalance will grow. Nothing has actually flowed opposite Germany's goods and services except debt.

If, on the other hand, physical gold flowed from London into Germany and the price was high enough that it offset the trade deficit, then there would be no trade imbalance. There would be no accumulation of debt. Everything would essentially be settled on a cash basis with no international debt. But in order for this to work in reality, the price of gold will have to be much higher than it is today because there's simply not enough gold to flow at today's prices in order to fill the trade gaps that already exist.

And here's another interesting note. It won't matter if London is still using the pound or if they switch to the euro. The gold still balances trade as it flows. So no, it's not a flaw of sharing the same currency that the PIIGS can't balance trade with others in the euro's core. It's a flaw of the current system which existed long before the euro was even born. Within the current system, the euro does remove the possibility of local currency collapse as an alternative adjustment mechanism, but honestly, that's part of what they wanted with the euro. The current system is one of irreversible debt-buildup and gold-debt which sterilizes the flow and price of gold.

Spur and Brake

Once gold is flowing at a high enough price to balance international trade, it will start accumulating in countries that run a trade surplus excluding gold (including gold, trade will balance). Likewise, it will start disappearing from those countries running a trade deficit ex-gold (excluding gold). This is how the spur and brake forces work on an economy in Freegold.

As the gold supply within a "deficit ex-gold" nation dwindles (think: USA), each piece remaining will become more and more dear in terms of other goods and services within that zone. In other words, the purchasing power of gold will rise in the "deficit ex-gold" zone vis-à-vis goods and services in that zone. Likewise, the purchasing power of gold will begin to fall in the "surplus ex-gold" zone (think Germany or China) versus goods and services in that zone because of the large and growing accumulation of gold.

At this point the large quantity of gold in the "surplus zone" will have a lower purchasing power against goods in its own zone, but a higher purchasing power abroad in the "deficit zone" and demand for imported goods will grow while exports will start to fall. This growing demand from abroad will be felt in the "deficit zone" and will be met with new supply. Likewise, the falling demand for imports from the zone with a declining volume of gold will be felt in the "surplus zone" and be met with decreasing supply. Incrementally, the "surplus zone" will slow production and increase consumption while the "deficit zone" experiences the opposite effect. Excluding gold, the balance of trade will shift back and gold will start to flow in the other direction.

Notice, please, that I'm not even talking about the flow of currency or price inflation/deflation in currency terms. Inflation or deflation in currency terms can be happening in either zone depending on how the monetary authority is managing the currency. But what matters in terms of the real trade flow will be the purchasing power of Freegold (not in currency terms, but) vis-à-vis the rest of the trade flow of goods and services.

If you have high currency inflation in the "deficit zone" because the government is printing like crazy, the price of gold will be rising even faster than the price of goods and services. On the contrary, if you have high inflation in the "surplus zone", the price of gold will be rising more slowly than the CPI, exerting its brake force on the economy because gold will still be found to have increasing purchasing power abroad and decreasing purchasing power on goods from its own zone. In other words, gold will be exported to other zones where its purchasing power is higher, spurring those other zones to produce more and putting the brakes on the overheated economy in the "surplus zone".

This flow will continue reversing back and forth forever, as it should be, because there is no such thing as a perfect equilibrium. And again, I want to draw your attention to the fact that I'm dealing only in the physical plane, ignoring the monetary plane. This is what Freegold does. And it doesn't matter if the "surplus ex-gold" and "deficit ex-gold" zones each have their own currencies or if they share a single currency. It still works the same way. Savers run the economy. Savers are the marginal surplus-producers and consumers. When the savers start saving more, it means the economy is producing more. When the savers start dishoarding and consuming, the economy is producing less vis-à-vis its balance of trade. This is the spur and brake force of Freegold, the international demand driven by the fluctuating purchasing power of gold as felt by the savers, regardless of any transactional currency effects with which the debtors may be tinkering.

Now that I've given you a brief description of how Freegold will work in the physical plane (it will also exert forces on the monetary plane, but that's a big subject for another post), let's take a quick look at how the present debt-based system, the $IMFS, differs in that it exerts the exact opposite spur and brake forces. In the present system it is debt that flows to fill in the same trade gap that will be filled by physical gold in Freegold.

As I said above, the US pays for 79% of its imports with goods and services exports. But the remaining 21% it pays for with debt that accumulates year after year. The US is the "deficit zone" and its trading partners who are accumulating US debt are the "surplus zone". Our trading partners send us 100% goods and services and we send them back 79% goods and services plus 21% US dollars. They then have to do something with those dollars. But they already have more than $4 Trillion in accumulated US debt. So what to do with those new dollars that keep coming?

If they were to insist on spending those extra dollars on more goods and services in order to balance trade, they'd simply drive up the dollar prices of goods and services relative to their own domestic goods and services. In the physical plane final analysis, they'd still receive less back from us than they sent us, and they'd simultaneously collapse the value of their $4 Trillion accumulated debt. So instead, they loan those extra dollars back to us at a nominal (not real) rate of interest and then we use them (again) to buy more of their goods.

So the more debt that flows as payment into the "surplus zone" economy, the more it is spurred to produce even more goods for the "deficit zone" to borrow. And the more "deficit goods" that flow into the deficit zone, the more dollars that must be recycled and the more the "deficit zone" must consume, which is, in effect, a brake force on the consumption-based economy. The brake force is being applied to the "deficit zone" and the spur force to the "surplus zone". The opposite of Freegold.

When debt flows, deficits accumulate and grow requiring more accumulation and more debt. The net-consumers are incentivized to net-consume more and more and the net-producers to produce ever more. There is no adjustment mechanism, no natural governor. This simply continues until the whole thing collapses. That's the only adjustment mechanism: periodic collapse. That's the $IMFS.

(For more on the Freegold adjustment mechanism, search for the word "Greece" in these twoposts and start there.)

Strong Hands

So that's where the Superorganism is taking us. But before I get into the issues of a windfall profits tax and confiscation under Freegold, I want to discuss one more concept, the concept of strong hands going into Freegold.

When anyone talks about "gold" today, that word identifies a whole panoply of gold-related investment options. They include unallocated gold credits, forward contracts for future gold, futures contracts for trading, ETF shares, gram-denominated savings accounts and e-money platforms, mining company shares, exploration company shares, certificates, options, derivatives and more. There are many ways to invest in this thing called "gold" through various counterparties today. And it is the market interplay of all these various options, much more so than transactions in and movement of physical, that determines "the price of gold" as it is widely referenced today.

This is what we mean when we say that today's "price of gold" is not the price of physical. Yes, you can still buy physical at that price, but it is the price of a wide range of products claiming the name "gold" more so than it is the price of a specific metal element.

This conglomeration of many tradable, counterparty options that purports to be part of something called "gold" is struggling to stay together as "the price of gold" rises. Market mavens like Jim Sinclair have long predicted the arrival of violent swings of magnitude as "the price of gold" battles its way higher. And it seems this breathtaking volatility may be just around the corner today.

In just the last 12 months we've seen "the price of gold" run from $1,350 up to $1,900 and then back down to $1,530. Not only that, but "gold" shot up $400 in just 7 weeks during July and August, and then it plunged $300 in three weeks. I wonder what the next run will look like. If it follows the same percentages as last year, we'll hit a very special number this year.

Each time the price swings up and down like this the "gold" traders trade their way in and out of their favorite paper gold positions. But the physical side is slowly working its way into stronger and stronger hands with each swing. Strong hands buy the dips while weak hands are selling in a panic.

I heard a story from a dealer recently about a poor sap who'd bought a bunch of Eagles from a company that advertises on TV, paid too high of a premium to cover all that expensive advertising, and he had also taken physical delivery which is why I heard the story. On the last big plunge into the $1,500s he walked into this dealer with his box of gold coins, head hung low, ready to cut his "losses". That's a weak hand. Someone who doesn't understand what he's doing when he buys gold coins.

As I've noted before, when I started this blog back in 2008, the highest "gold price" predictions I had ever encountered (other than A/FOA) were in the range of $1,650 to $2,000 per ounce. That has obviously changed. Today we read a variety of future price predictions ranging from $5,000 on up to $50,000 per ounce. But the problem I see with my fellow high price prognosticators is that they don't support those prices with an explanation as fundamental as Freegold. This is a problem.

That special number I said we could hit this year, if the trend doesn't accelerate and simply repeats, is $2,333. The low to high in the last 12 months matches a rise from today's price to about $2,333 in the next 7 or 8 months, if we were to have an exact replay. And the problem is that $2,333 is the inflation-adjusted (based on official inflation) peak from 1980.

Fair warning to all gold bugs who don't understand Freegold

I'll make a prediction right now. As we approach and surpass $2,333, other high price predictions notwithstanding, you'll read articles from all of your favorite gold bug writers making the comparison with the 1980 peak. And if the ascent is anywhere as vertical as it was back in July and August, that comparison won't be lost on a single gold bug. No one wants to miss the top like so many did back then.

So when it starts to fall after a vertical rise, and it will fall, no one will be thinking about those other high price predictions. Instead, they'll be thinking "get out now, just in case. I can buy back in later and make a profit." This group will include all paper gold traders as well as a good portion of the "physical" gold bug community. And because of the "specialness" of that number, $2,333, there won't be any paper gold buyers trying to catch the knife, so it will fall hard. Possibly too hard. No one wants to be that guy who bought on the way down in 1980.

This could potentially be the final shakeout of weak physical hands, because there will be plenty of strong hands catching that physical even though physical buying won't stop the price from falling. Unfortunately for a few long-time gold bugs, the lack of a fundamental and foundational understanding of a much higher value could see them liquidating at the worst possible time in all of history. And that would truly be a shame. At least I have given fair warning. I'm not predicting that this is the way it will play out. Only that it could. And being aware of this possibility has value if it gives you strong hands at a key point in time.

Tax That Gold!

Now we can talk about windfall taxes and confiscation (related topics). Hopefully you were able to absorb the above concepts. The human Superorganism is revaluing gold vis-à-vis not currency, but everything else, for a purpose: the gold must flow. Again, the Superorganism is revaluing gold in real, not nominal, terms. (It is also devaluing the US dollar in real terms, but that's a separate subject for a vastly different post.) And going into Freegold, physical will start out in the strongest of hands, meaning people like you and me who know what it's worth in international terms and Giants who don't need to sell during suboptimal conditions.

But before I get into taxation, I'd like to discharge the confiscation meme once and for all. Physical confiscation only makes sense if you are going to confiscate the gold and then, and only then, nominally revalue it yourself hoping that your currency is strong enough that a nominal revaluation actually delivers you a real windfall (see: 1934). But as I said earlier, the human Superorganism is revaluing gold this time, not FDR or the USG. So taxation is the only option. That said, I would not leave my gold where it, or my capital gain, could easily be automatically absorbed during a short-lived government misstep, which is why I recommend personal possession or at least the closest thing to it.

The first thing you need to understand is that the IRS taxes nominal gains only. It does not tax real gains. It is as blind to real gains as it is to real losses. The tax law would have to be completely abandoned and rewritten from scratch in order to tax real gains. This is not going to happen.

So let's make an assumption and see where it leads. Let's assume that the Freegold revaluation has occurred and the USG has decided to impose a 90% windfall profits tax on its citizens who hoarded physical gold through the transition. What will be the consequences of this action and who will be hurt?

Now, because the US is blind to real gains, you'd have to sell your gold at the new Freegold price in order to make a taxable nominal gain. Until you sell, you still have the same thing you had before the revaluation, a single gold coin. For all they know you'll hang onto that gold and the price will once again fall and you'll still just have one gold coin worth much less. Or maybe you'll lose it in a boating accident, or it will be stolen, and you'll have no gain. The only gain the IRS recognizes is nominal gains. (Here's a comment I wrote back in 2010 on future gold taxes.)

Part of our premise in this exercise is that Freegold has arrived, along with everything that comes with it. So even though the USG has misstepped and put on a 90% gold tax, the rest of the world has not and is now enjoying a technically balanced trade flow along with the reappearance of Jacques Rueff's "forceful but unobtrusive master, who governs unseen and yet is never disobeyed."

Let's ignore hyperinflation for now and talk in constant dollars. Gold now has the purchasing power of $55,000 in 2012 constant dollars. Your gain per ounce is roughly $53,500 and the government wants 90% of that money, or $48,150 leaving you with only $6,850 worth of purchasing power for every coin you choose to sell. Meanwhile, those strong hands in other Freegold countries have $55,000 in purchasing power for each coin they choose to sell.

Strong hands in the USA have $6,850 in constant dollar purchasing power. Strong hands in the ROW (rest of the world) have $55,000 in purchasing power. The gold must flow, but will it flow from the USA as much as from other deficit countries under these conditions? If it does flow, it will still flow across international borders at the new Freegold value and vital goods and services will flow back into the US. But only 12.5% of the purchasing power of that gold will go to the person with the choice of "to flow or not to flow" while 87.5% goes to the USG.

Tax laws always change, and this is a fact that will also be factored into the decision "to sell or not to sell" that strong hands in the US will face. Another factor is black market arbitrage. A strong hand in the US won't have to engage in smuggling gold out of the country himself in order to gain more purchasing power than $6,850. With $48,150 per ounce in potential black market profit (that's $1.5 billion per smuggled tonne), it's not hard to imagine a vibrant black market that would gladly pay you twice your $6,850 off the books.

So if the gold in private hands in the US doesn't flow in sufficient amounts, given that US debt has been discredited through the Freegold phase transition, the government will have no choice but to continue printing money in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people. And in a last-ditch effort to support its own failing currency, it will have to ship Fort Knox gold overseas. FOA mentioned something about this: "…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates."

In this scenario, the need to continue printing in the face of an ongoing currency collapse will obliterate any miniscule gain that comes from the few shrimps who actually decide to sell their gold in an untimely way and pay the tax. The US has precious little gold in private hands as it is. And it will need that private gold to flow. It needs you to sell your gold to your dealer so your dealer can export it to our trading partners. That's how trade flows will resume under the new paradigm, with savers choosing to let their gold flow because of the amazing purchasing power it delivers.

And with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital in its purest form based on the silly notion that the hungry collective deserves a windfall nine times greater than the gold investors who kept gold inside the zone through a turbulent transition. The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

And once again, being aware of this possibility has value if it gives you strong hands at a key point in time.

415 comments:

EU - Proposal for a Council Directive on the common system of value added taxBrussels, 3 October 200512913/05LIMITEFISC 115NOTE from: Presidency to: Working Party on Tax Questions – Indirect Taxation (VAT)Subject: Proposal for a Council Directive on the common system of value added tax= Presidency compromise

""...(74) The application of the normal VAT rules to gold constitutes a major obstacle to its use for financial investment purposes and therefore justifies the application of a specific tax scheme, with a view also to enhancing the international competitiveness of the Community gold market.

(75) The supply of gold for investments purposes is inherently similar to other financial investments which are exempt from VAT. Consequently, exemption appears to be the most appropriate tax treatment for supplies of investment gold.

(76) The definition of investment gold should cover gold coins the value of which primarily reflects the price of the gold contained. For reasons of transparency and legal certainty, a yearly list of coins covered by the investment gold scheme should be drawn up, providing security for the operators trading in such coins. That list should be without prejudice to the exemption of coins which are not included in the list but which meet the criteria laid down in this Directive...."

"...(81) In view of the huge number of transactions carried out on a regulated bullion market and the speed with which they are effected, Member States must be allowed to disapply the special scheme, to suspend collection of VAT and to relieve operators of certain accounting requirements..."

EU - "VAT: special scheme for gold"ACTCouncil Directive 1998/80/EC of 12 October 1998, supplementing the common system of value added tax and amending Directive 77/388/EEC - Special scheme for investment gold. (Official Journal L 281 of 17.10.1998)

...SUMMARYIn order to promote the use of gold as a financial instrument, this Directive introduces a tax exemption for supplies of investment gold. Previously, the normal tax arrangements applied to investment gold...

[Mrt: Check the date of this one...well BEFORE 2000, Note that archives show looong history of the Tax harmonization in the EU countries, definitions synchronization, etc. Well in advance, nothing new.]

JCT. "...trying to scapegoat anybody is useless. It is the fullbody of the system which has to be reviewed. We have to take care and in my opinion things have to be changed in absolutely all parts and parcels of this global financial system. Without again giving any priviledge to anybody any institutions or any instruments..."

"JCT. "...trying to scapegoat anybody is useless. It is the fullbody of the system which has to be reviewed. We have to take care and in my opinion things have to be changed in absolutely all parts and parcels of this global financial system. Without again giving any priviledge to anybody any institutions or any instruments..."

[Mrt: - Check the pic 1. volume = the slowdown on amount of sales.And then how this syncs with this one about End of CB gold selling and leasing...?- Another´s comment: "No form of paper wealth will survive the financial crush once the CBs stop selling! NOTHING!" We face the known:- in 2009 IMF sold its last gold, gold miners closed their hedge books and CBs became net buyers!]

I guess it depends on the tradition of the jurisdiction you live in, what kind of taxes might be and will be applicable. If government just taxes the flow (capital gain, VAT) or the possesion (property taxes).

I would not be so positive like FOFOA on that, just because looking through the freegold lense, it would be reasonable to have gold tax free. Governments are not reasonable and not fair, if somebody thinks that: WAKE UP.

Even in Switzerland they do have property taxes, which includes gold possession!

In Germany today they do have very high income taxes, high obligatory ponzi scheme social security, moderate capital gain taxes (not on gold), no property taxes (only on real estate).

But I still would stay with gold, no matter what the tax code would be: Who can prove how much gold is burried in you back yard, or how much have you spend? (one of the big reasons I suggest also to have small gold coins as diversification)

Also remember: The government does not want your money or your gold. The welfare state can print whatever money/promises they want. They want your labor, the real one, not the tokens for it. In Germany they did that a couple of times in the last century, always seized the land and houses of the people, putting a mortgage on them, not for the money but for the "slaves" to work it off.

P.S. Sorry for the bad undertone, just thinking of that matter drives me insane ;)

This is a really useful post, especially for the detailed explanation of trade flows pre and post Freegold. Another little lightbulb in my tiny mind is now burning brightly. Thank You.

I am still reading the archives here, have finished 2010, and decided to jump back to 2009. It's so weird, I've just read the post 'Open the Mint to Gold', which was absolutely fascinating, and really useful info, but I paged down and guess how many comments there were....not one! (so I added one, seemed rude not to).

Yes, MF and all, I agree, the only place my gold will flow if there is punitive tax would be to some place in the world where there is low/no tax.

And finally, taking the bull by the horns, I am today sending off forms to start the process of moving a defined benefit/final salary pension (the only one I have) away from my ex-employers £8billion scheme, into a private plan, in order to hold it all in physical.

Have a guess how much of the company scheme's £8b is held in physical gold? 0.

From the tone of your posts (I may be wrong, and I'm sure you'll let me know if I am, please do)it seems as though you believe that "the elites", TPTB specifically aim to tread on us ants. It seems as though you believe the very treading on us, the act of squashing us, is their primary aim.

FOFOA gave a different perspective (I can't quite remember where, I thought it was Life in the Ant Farm, but it ain't), which is that yes, us ants do get squashed by giant feet, but that is simply a by-product, a secondary effect, of the seemingly impunitive action of the giants.

You see, as we are the ones getting stepped on, we apply greater significance to the act. The giants are merely going about their giant business without care for the ant massacres that occur.

There is a subtle but important difference here. The result of which means that if you are a clever and observant ant, you can watch and predict where the footsteps will land and avoid these somewhat unpleasant events.

Better than that, if you are an ant lucky enough to be a part of an ant collective who have organised themselves into a mini-superorganism, you might even be able to work out a way of benefiting from the wreackage that these marauding giants leave in their wake - "When the seagulls follow the trawler, it is because they think sardines will be thrown into the sea." Eric Cantona.

Strengthening the Asia/IMF Relationship in a Highly Uncertain Global EnvironmentSpeech at Asian Financial Forum by David Lipton, First Deputy Managing Director, International Monetary FundHong Kong, 16 January 2012

my main concern is, there are no giants, elites, TPTB. I have the impression they are retired or dead. Whats left is just a bunch of welfare state morons.I live in Europe and since I started reading FOFOA I was always wondering where I might find those giants, must be somewhere, at least the traces to be seen, if stepping up very high. So I really looked up all CVs of all politians (especially where they came from) and EU economists, read a lot of recent history. And especially watching the EU it appears more and more to be a sequel from the movie Idiocracy. Scary, yes?

The european superorganism appears to me more like a "no alternative" business to ease the necessarities of any kind of socialist fantasies. From Brussels comes nothing else but garbage, worst of the worst to run or support economies (at least looking from the austrian school perspective). Now somebody tell me, this is just a facade to hide the ultimate freegold plan? Whats gold good for, if everything else is burned down (okay and thats also part of the reason I personally hold gold, it's eternal, no alternatives).

Now the conspiratist part: Who got Greece into the EU? Who profits from having a former communist as the head of the european commission? Who profits if the social tentions are dramatically increasing between the people? Who profits to have former Goldman Sachs people to be head of Italy, the ECB....Definitely not the "old golden economy" or those giants who started supposingly the Euro. Maybe you or FOFOA can tell me.

Your last post is a perfect example of the difference in perspective that I described.

You are ascribing malicious intent to actions that can more easily and naturally ascribed to self-interest of big players, acting without consideration for ants (or with just a symbolic hat tip to help grease the political wheels).

On the subject of politics, if you are looking for giants among politicians, then you'll never find them, and I would put forth that perhaps you haven't grasped the concept of giants, big money and intergenerational wealth.

When I mention giants, think Saudi Princes, Sovereign Wealth Funds, 500 year old European landed-gentry etc. These guys keep their heads down and don't step into the limelight.

I know quite a lot of aristocrasts, those are a really special bread when you marry and have children over a longer period of time inside your own family, strange things happen, but definitly you are not getting giants as children.(e.g. Is the queen a giant? How does it come that her grant children are the way they are. Or just look at the Prince of Hannover...)

I dont know about the middle east maybe there are some, but as I said, I am born and raised in Europe, but I can tell for sure what's going on here. Sure I am not looking for giants among politians, but at least I know how those folks are ticking. And if I assume that 100% of all politicians are brown nosers exclusively to the public (at least I havent found the opposite prove), where lies the influence at least necesarry somehow?

About the "big money", who do you refer to, how much do you need to become a giant? Should be at least one or the other castle, influence what so ever to find. Yes there are influences, party donations and suddenly you get a new law in favor of something new stupid (propably just like in the US), but that has nothing to do with "giants".

you have to take into consideration that there are quite a lot of black swan events, even not able to control by "the giants", e.g. the outcome of the dissolution of former East-Germany or the raise of China and lots of other technical and social developments.

To just still insist on "the giants", reminds me of Lindsey Williams storys and should not be an investment strategy by anybody.

So...we are not speaking of giants in the sense of physical abnormalities due to inbreeding; we are not speaking of giants in the political arena, nor are we speaking of giants in the central banker arena.

What we are speaking of is superproducers. Those who create so much excess stuff( think wealth) that they could not easily use it all.

So to name some giants...the Saudi Princes who receive the revenue from the oil production, the Rothchild dynasty, the Queen (is quite likely), the vast Vatican wealth horde, supranational wealth funds, various multi-billionaires ( that stay out of the limelight), some old european aristocracy, etc.

Your impression of them being retired or dead is the exact impression they want you to have. These are not flashy paper billionaires like Warren Buffet; these are the people who move in the shadows( not meant in a sinister way, simply that they do not flaunt their wealth).

"Throughout human history the division of labor, or economic specialization, has brought fantastic growth in total human output and led to the astonishing complexity of modern computers and industrialization. These vast leaps were truly the accomplishment of the distributed intelligence of the human superorganism, with a relative IQ perhaps in the thousands.

And behind each great leap of mankind was a string of important decisions made by methodological individuals. This is true capitalism. In order for the human superorganism to display its "IQ in the thousands", certain specialized individuals must be free to make the most important decision. The individuals I'm talking about are the savers, or as I sometimes call them, the "super-producers".

They are the people whose contribution to society exceeds their own daily needs, creating an excess of wealth. And the most important decision for the human superorganism is the savers' choice between hoarding their wealth, or deploying it into the economy!"

"Do you realize that somewhere out there, there is perhaps four billion (with a b) ounces of gold in private hands (in many forms, including coins, bars and jewelry)? A lot of this gold was accumulated by families over many generations. It is only in modern times (and in the West) that we think of our "nest egg" as something that should be deployed into the marketplace in search of a yield. That we must trust it to a "manager" who we pay to churn us an ROI. This is a very modern and Western view. The rest of the world (the rest of time for that matter) views wealth a little differently.

ANOTHER: This brings us back full circle, to the problem of "digital currencies" and the "mind set" of much of the simple ( and rich ) third world persons. To many of these people, wealth is the surplus of life's work that you pass on after death. Currency is something you, spend, trade or hold for a few years. It isn't wealth.

When Another spoke of "rich third world persons" and "old world giants," what quantities of gold do you think he was talking about? Mr. Gresham asked him once:

Mr. Gresham: "We who read here generally buy the coins, one ounce and less. The "Giants" you speak of are usually buying the large bars (100 ounce?), yes?"

ANOTHER: "I ask you, how many of your bars in tonne? This is the small purchase size."

Good question. How many 100 ounce bars are in a tonne? The answer is 321 and a half. Or 32,150 ounces. And this is a "small" giant! 4 billion ounces in private hands. Let's take just half of that and wonder how many of these "small giants" there might be in the world. 2 billion divided by 32,150 = 62,208. So I'm going to go out on a limb and say, conservatively, that there are probably "tens of thousands" of these so-called "giants" in the world. That 4 billion ounces is out there somewhere, in private hands, and that kind of family wealth doesn't necessarily show up on things like the Forbes list."

And with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital in its purest form based on the silly notion that the hungry collective deserves a windfall nine times greater than the gold investors who kept gold inside the zone through a turbulent transition. The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

=================================

Here is a similar comment - think hard this is an important idea:

It sounds like you understand the separation of monetary functions. Transactional versus wealth. Time plays a big role in the gap between the two. The longer you hold transactional the more it acts like wealth.

Government can always control transactional. It has no control over wealth, meaning it has no control over how long you hold the currency or its derivatives. That requires gaining the confidence of the "no ones" that are "superproducers". Wealth is whatever they (we) decide to spend our excess transactional earnings on. Some wealth items hold their value better than others. The inflation tax subtracts from our "wealth savings" as long as it is paper promises denominated in transactional currency, which requires earned confidence.

The govt and the bankers (the $IFI- international financial industry) are losing the confidence game. The only way to regain the confidence they once commanded is to earn it again. Application of force is a self-defeating strategy for something like this.

If enough force is applied to a population then there will be nothing for govt to skim. The people must be productive beyond their daily needs. And in order to have a productive population, they must be willing to work for more than just the bare necessities of life. Of course they will do whatever it takes to survive. But as a govt, you want SUPER-PRODUCERS.

Gold can rebuild confidence and give the superproducers something to save in. For China and Asia, it will give them a trade settlement base that is decentralized and stable. It will give them a real trade advantage when the dollar collapses.

I understand what you talking about. But the essential question is: Are they actually actively influencing the monetary evolvement?I personally hold more gold than I can carry, am I a giant? At least I am a superproducer, but I dont have any influence on the outcome... You see my point here?

Now, lets assume there is not a "Conspiracy-Gold-Giant-Horde", just some people that inherited those faults or just "love to stack yellow stones", how to judge their stake of the total above ground gold stock?What are their vaults doing when prices move? Are they stacking more or can we technically consider their vaults as a landfill?I am asking, because to me the stock to flow ratio is one of the most essential point to gold.

A small-minded ant's only interaction with Giants may be getting stepped on or sprayed with deadly poison. So from the ant's limited perspective, this activity of killing ants is what Giants live for, what motivates them, and what they spend their time scheming and planning for. Don't limit yourself to the ant's perspective. If you want to find the tasty morsels left by Giants, you've got to start thinking like a Giant. You can read more about ants in my post Life in the Ant Farm."

So that's where the Superorganism is taking us. But before I get into the issues of a windfall profits tax and confiscation under Freegold, I want to discuss one more concept, the concept of strong hands going into Freegold.

[...]

Each time the price swings up and down like this the "gold" traders trade their way in and out of their favorite paper gold positions. But the physical side is slowly working its way into stronger and stronger hands with each swing. Strong hands buy the dips while weak hands are selling in a panic.

[...]

This could potentially be the final shakeout of weak physical hands, because there will be plenty of strong hands catching that physical even though physical buying won't stop the price from falling. Unfortunately for a few long-time gold bugs, the lack of a fundamental and foundational understanding of a much higher value could see them liquidating at the worst possible time in all of history. And that would truly be a shame. At least I have given fair warning. I'm not predicting that this is the way it will play out. Only that it could. And being aware of this possibility has value if it gives you strong hands at a key point in time.

[...]

The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

And once again, being aware of this possibility has value if it gives you strong hands at a key point in time.

no, not really. Lets say all of those "giants" die today and the vaults get forgotten by their heir. What does that mean?It would mean that this gold can not be accounted to the above ground gold stock market place. Because it is not being hold although FIAT is bidding for it, but simply its "just tradition to have XY m/t of gold". On the other hand the heirs are not increasing the vaults and stacking newly accumulated FIAT, although the current price....

This perspective would put the market situation concerning gold giants into the similair situation like silver ending in landfills, no?

Your suggested scenario ( unlikely though it may be; and it is extremely unlikely at that) would effectively reduce the total available stock, which would mean that the gold price would need to go even higher than FOFOA's projected $60k in order to balance world economic trade.

"Because it is not being hold although FIAT is bidding for it, but simply its "just tradition to have XY m/t of gold". On the other hand the heirs are not increasing the vaults and stacking newly accumulated FIAT, although the current price...."

What do you think is going on in the oil states? Do you think the oil for gold deals are still going on? From an email:

"Basically, Europe’s support enabled oil to get the gold on the cheap. Once the euro was born, gold was free to begin its rise, and it did! Starting in 2002. That’s when “oil” just backed off the paper gold market and waited for it to implode, all the while spending its surplus dollars on cool shit instead of gold for the last decade. But at the same time, the US let China into the WTO and in exchange, China picked up the ball."

The physical portion of the paper gold market is cornered, plain and simple. Too many dollars out there in the world, not enough physical at these prices. The physical is in strong hands, its not available in the current paper price discovery market.

"This could potentially be the final shakeout of weak physical hands, because there will be plenty of strong hands catching that physical even though physical buying won't stop the price from falling...I'm not predicting that this is the way it will play out. Only that it could..."

Was talking to a doctor some time back; had purchased a certain amount of ounces for each of his 2 daughters. Avg price was low. His plan is to sell when it reaches a certain paper price that could perhaps be hit in 2012.

Odds are high there's many others out there with the same mindset. Especially difficult to persuade an individual who has lived through and remembers the 80's collapse of the paper gold price and who believe we are close to the top in the paper price and who believe cycle will repeat itself again.

"Basically, Europe’s support enabled oil to get the gold on the cheap. Once the euro was born, gold was free to begin its rise, and it did! Starting in 2002. That’s when “oil” just backed off the paper gold market and waited for it to implode, all the while spending its surplus dollars on cool shit instead of gold for the last decade. But at the same time, the US let China into the WTO and in exchange, China picked up the ball."

Excellent post FOFOA. In just one post I feel that I got my money's worth from my recent donation. You continue to rank in my top spot for best site on the internet.

On the subject of websites, jaqship - you should seriously consider re-doing your website. I didn't try to view it with IE as I hate IE but I'll just say it needs work.

and on the subject of taxes - India appeared to be doing everything right lately. Allowing more banks to import bullion, easing up on gold dore restrictions, and then today they slap on a 2% tax

"(Reuters) - India hiked its gold import duty by 90 percent and doubled the tax on silver on Tuesday as the world's biggest consumer of bullion seeks to increase revenues, sending futures prices higher and hitting shares of jewellers.

India changed the import duty on gold to 2 percent of value from the earlier flat 300 rupees per 10 grams and that of silver to 6 percent of value from 1,500 rupees per kilogram, the government said in a statement."

Yes, and upon the testing it will dawn on the populace that paper is not gold. This would be the watershed moment for FreeGold. In the meantime the paperpushing strong hands will try and get as much physical as possible...perhaps a scenario like the one FOFOA outlined above could occur.

"BTW, the previous five GLD pukes were kind of lame (Aug 11,23,24 and Dec 15,17). Where is the action?"

A cluster of five GLD pukes is unprecedented, but the market seems to be calm. As mortymer said, either something big is happening behind the scenes, or this indicator has outlived its usefulness.

Further,

How about this as a potential alternative explanation for the am-pm gold price differential:

The buyers are mostly in Asia, buying in the pm market. The sellers are mostly in the West, in the am market.

The arbitrage opportunity doesn't close because, in order to really close it, one would have to ship gold from London to HK, and the cost would be greater than the spread.

It reminds me of a story I heard about: a man from the northern midwest US (Montana? Minnesota?) went to college in Southern California. While at home in the summer, he would buy old convertibles and refurbish them, then drive them to college in the fall and sell them at a profit.

"If, on the other hand, physical gold flowed from London into Germany and the price was high enough that it offset the trade deficit, then there would be no trade imbalance. There would be no accumulation of debt. Everything would essentially be settled on a cash basis with no international debt. But in order for this to work in reality, the price of gold will have to be much higher than it is today because there's simply not enough gold to flow at today's prices in order to fill the trade gaps that already exist."

Let's say that freegold has arrived and gold begins to flow to counteract these imbalances. As the imbalances shrink, would the value of gold decline?

yes, I fully agree with your suggested explanation of the am/pm effect. This is so good that I repeat it here:

The price of gold during the Asian trading hours might be systematically higher than during the European/US trading hours because there is a constant flow of gold from Europe/US to Asia. The price difference is the shipping costs per ounce.

This makes sense provided that* this effect is caused by the movement of physical gold (shipping costs for paper gold are zero)* transactions in physical gold happen mainly during the day in the respective regions as opposed 24h around the clock

Nickelsaver,

I know that Another/FOA said that the gold price (London fix, i.e. largely paper) might drop and physical become unavailable. This was in 1997-2001 and during that time it would have come as a huge surprise to everyone except for a couple of insiders.

Now there is the entire goldbug crowd out there watching for a COMEX failure.

Here is a question: Wouldn't the BBs, as institutions, fight for survival? Failing to allocate the physical would be at least the degree of breach of trust as failure to pay out cash from a bank account. The banking system would be without trust the next day - 100 times worse than MF Global.

Wouln't the Fed try to save even this aspect of the BBs? Printing enough US$ so that the BBs can bid for physical gold in order to remain able to satisfy the allocation requests?

"The price of gold during the Asian trading hours might be systematically higher than during the European/US trading hours because there is a constant flow of gold from Europe/US to Asia. The price difference is less than the shipping costs per ounce."

Meaning, that the arbitrage can't be closed by simply shipping pallets of gold from London to Asia. But the difference is enough to divert flow from producers like the Perth Mint.

And yes, this would mean that the price is based on physical availability, as otherwise you would be able to close the arbitrage with paper.

I think what you are saying is that the BBs would attempt to keep from having to deliver by offering a higher cash settlement and therefore a higher papergold price, and buy reaction the weak hands would see this as the time to sell and get out, causing the price to then drop.

But what if the total amount of delivery demand was very large. Would the market be able to react fast enough to cause this spike and dive in price?

"International Finance - in DIGITS which are simple numbers lacking any substance - is also a mess which no one has a clue how to fix, how to keep working. And this is not hard to understand: if no principle has guided its construction and structure, how can a human being tackle its reconstruction? It cannot be done. It is not possible to rebuild something which is a hodge-podge of ad-hoc arrangements, lacking any ordering principle."

I think this statement gets at the root of a lot of the darker issues surrounding what is going on.

Under an RPG system, it becomes far more difficult to take title to and lay future claims to the use of real capital without creating something of real value versus simply claiming that something is of real value.

But I would guess if you had the resources of a giant and recognized a false and self destructive equilibrium you would use it to your advantage for as long as it remains functional.

But if I read some FOFOA correctly, the problem is, it's not an optimal system for the superorganism and therefore will pass into history with certainty.

The giant buyers only have one shot to accumulate and you get a lot more bang for your buck buying low while the paper players continually test the weak hands who aren't quite sure what the market is really telling them or what really has value.

I read as much as I can of what FOFOA and you all have been kind enough to put here, so I'm now 80% sure handed.

A tax post facto doesn't make much sense, but as much pillaging of wealth as possible before the ship goes down, You bet!

Jaqship,I don't want to pile on, but I have to second Max De Nero on the issue of the website. Consider employing a graphic design professional to put together something that reflects your business in the same way you would have someone lay out a brochure. WYSIWYG websites are for families and clubs and such -- businesses employ professional web designers.

As I'm always thinking of new substance to add/adjust on my website, I've been loathe to hire someone, as opposed to being able to act instantly. But I'm taking a break from site work to pitch in to this gripping thread on Giants etc.:

Aiionwatha's Nation, "A tax post facto doesn't make much sense, but as much pillaging of wealth as possible before the ship goes down, You bet!"

Indeed. We may have a Tragedy of the Commons type of situation.Especially in the U.S., which has been subject to a truly historic level of malgovernance these past few decades, dwarfing anything that the Western World has seen at least since Hitler swallowed his gun in the bunker.It is all too conceivable that nefarious elements have been pulling strings for decades, to ensure the end of middle-class life and the rule of law in the US.

It seems that, whatever Patriots in the USG may want to fix may be sabotaged by those "right people" who (behind the scenes) may have been pushing this malgovernance upon the country and the world. Whether policies such as a draconian tax on gold will happen, may be determined by fist fights or gun battles, in such places as the basements in the key buildings in Langley, VA.The Giants may lack the power (by being blackmailed?) to stop the sabotage. We must hope that the Patriots have not already been purged from Langley etc..

the BBs would attempt to keep from having to deliver by offering a higher cash settlement

Either that or, because it is probably not sufficient, that the Fed provides ample US$ liquidity to the BBs so that the BBs can go out and bid for physical gold in the market. If the US$ price is high enough, there will be sellers.

If we are right that the BBs just engage in borrowing and lending, but have no price risk themselves, i.e. are not short gold in US$, then this is only a question of liquidity.

If they offered 60k US$ per ounce to me today, for example, I might be willing to sell a part of my gold and switch into other real assets instead (wouldn't hold the US$ for long though). Alright, when you factor in all the political uncertainty, in a serious dollar crisis, they might have to offer a substantially higher price until they can induce sufficiently many people to sell. US$ HI might hit lightning fast in this scenario.

RLP,

That sounds like the fed inducing freegold when the shit hits the fan.

Yes, basically, that's what I am saying. I keep thinking about what would be better for the US, for the USG, for Europe, for China, for the world, for myselfa) the transition comes surprising and lightning fastb) the slow death of the old system drags on for another decade

Further to your point about the doctor who plans to sell, Eric Janszen of iTulip fame, and someone who has been mentioned in other comments on this blog, is in the (eventual) seller camp. Here's a quote from almost two years ago: "Gold is wealth FIRE insurance. The insurance premium keeps rising as more investors see and smell the “smoke” as sovereign debt defaults, the inevitable result of financial system crisis bailouts. Peak Cheap Oil added fuel to the FIRE. First come the crises, then the resolution of the crisis. The time to get out of gold is between the end of the crisis period and before the onset of resolution. Stay tuned. It’s going to be a rough few years." http://www.itulip.com/forums/showthread.php/15580-Before-the-FIRE-Gold-Update-Is-1-237-the-new-720-Eric-Janszen?p=161353#post161353

So clearly, he will eventually advocate selling. I seem to recall a Janszen article wherein he forecasted the time to sell would be somewhere around $3,500.00/oz. (Unfortunately I can't find the citation). The question, of course, is what exactly resolves the crisis. If it's ultimately freegold, then he and his acolytes will in the end be most sorrowful. We shall see.

"Net Central Bank Gold Demand At Highest Level Since 1964.Central bank gold demand totals 430 tons in 2011, says GFMS.--Figure is five times the volume of 2010, and the highest level since 1964--Central bank gold demand forecast to total 190 tons in first half of 2012 " GFMS: From here h/t Trader Dan

Thanks for another excellent post! I love it when you talk confiscation. This is always a discussion point within my group or with newbies because it plays to our darkest fears, that we will do our homework and endeavor to walk in the footsteps of giants, only to be squashed in the end by our own government for the effort. Thanks for a piece that will always be timely.

I appreciate the link for the PDF files on the blog. It will be much better to send my people to the source rather than to my site referencing the blog. I am working on your summary and will have it available shortly. Also, I will be starting a "live" 2012 Compendium that I will update as we go.

Others have said it, as will I. If you dear reader find knowledge here, it by definition has value. Please give back some of that value in the form of a donation for our distinguished Professor of Freegold.

Either that or, because it is probably not sufficient, that the Fed provides ample US$ liquidity to the BBs so that the BBs can go out and bid for physical gold in the market. If the US$ price is high enough, there will be sellers.

If we are right that the BBs just engage in borrowing and lending, but have no price risk themselves, i.e. are not short gold in US$, then this is only a question of liquidity.

If they offered 60k US$ per ounce to me today, for example, I might be willing to sell a part of my gold and switch into other real assets instead (wouldn't hold the US$ for long though). Alright, when you factor in all the political uncertainty, in a serious dollar crisis, they might have to offer a substantially higher price until they can induce sufficiently many people to sell. US$ HI might hit lightning fast in this scenario.

If it got to this, don't you think it would simply be easier for the market to shut down, and void the transaction(s), and take funds from some other MF Globals.

Either way, it seems obvious to me the system would lock up on demand, not on surplus, i.e. high price. Unless while locking up, the price plummets reflecting a total decoupling of the system. In that case, street value would be enormous.

@VTC: "Reply to Yours a) or b)"The way I see it there is at the moment this policy, lets call it c)"As long as markets function somehow":(or this seems to be the interpretation of observations I can share atm, could be invalidated tomorrow)- A timeframe defined in about gold ascent 10 - 30% per year, no target day, rather reaching APs[Would´t this be best for re-shaping the system? and also for finding the right price of gold in currencies, and currencies in gold? Do we want to set a price of currency or the other way? Or let get both enough time to find slowly its right valuation?]- The the most important couple USD-Euro in 1,20-1,50 range[Would´t this be the best way to let free slowly the wealth denominated in debt to find better uses? A lot of shenanigans but beat me. I tried to find some reason.]- Keeping the flow on (not too much/not too little)[Could this be explained perhaps by IMF running all around the world trying to slow the drying? - Just a blind bet.]- Control of the collateral damage providing liquidity and support, re/ballancing- Cooperation on CBs, ECB-FED, IMF, OECD, etc. when nobody wants to rock the boat[Those 2 - gold BIS fraction and debt IMFS fraction - They play along but have different objectives]- There are several crisis scenarios prepared raging from yours a) to b) on both sides. So far there is a match or it seems to be.[Ongoing process in fine-tuning policies, we observe - "kick the can down the road"]- Meanwhile the system is being prepared, negotiations ongoing on many levels OPEC holding support for present (gains most if transition smooth and there are no disruptions in demand) holding oil in pre-defined range.

The question I asked is: Why to shred the present system when it is so subtle and it still "delivers"?

This goes along the lines of Euro founders that they defined wide and main stones and let circumstances shape the Euro in interaction with its environment.

What would be the best strategy to this I think is a well known: "Prepare for worse, hope for best"?

Michael H said:Let's say that freegold has arrived and gold begins to flow to counteract these imbalances. As the imbalances shrink, would the value of gold decline?

Interesting idea. If (by odd chance) all zones of the world have no deficits (ex. gold), gold wouldn't be needed for that function (spur/brake) at that snapshot in time...

But wouldn't gold still keep its utility as "store of value" as long as some individuals produce more than others? Fiat money, cigarettes or canned goods would still be inferior to gold as long-term store of value for super-producers, even if your country happened to have a balanced trade flow, right?

The only scenario I could imagine where gold would have no value is in the perfect communist paradise where _all_ the fruits of ones labor goes to the collective, and gets redistributed based on dear leaders instructions. As long as we're allowed to keep some portion of our salary, gold will have function and value.

yes, I can see the reasoning for this approach. In particular when you take a look at a long term chart of gold in US$, you see this extremely nice and steady price increase at a rate of about 15% annually in nominal terms. The long term gold price chart indeed looks a bit 'fixed' and unnatural.

Then, however, you have to ask how expensive this price management is. You will need physical gold in order to sustain it. Again, I ask, whose gold is it?

Thanks much for your thoughts; they have spurred thoughts about various options.I'm willing to pay a certain amount for ease of access; Wordpress seems a mess regarding drop-down menus. You read me right on labor of love etc.

Whether combatting inflation or whether combatting deflation, the central bank has only one policy tool, namely, printing more money.

He then goes on to say:

It should be clear that as long as the world does not succumb to a military conflagration such as a world war destroying supplies of goods and production facilities, the danger is not inflation as predicted by the Quantity Theory of Money. The danger is deflation due to risk free-profits with which Keynesian economics inadvertently tickles speculators.

It is suggested that the world is facing an imminent inflationary collapse of the dollar for reasons of over-issue. But what the world is getting is a deflationary collapse of the economy...

This seems to me to suggest that Fekete believes that in order for the FED to do the only thing it can do (print money), it must first have a war.

"It should not be beyond the wit of human intelligence to see this coming and fend off the disaster by making a timely return to sound money, based on a monetary unit of a positive value as mandated by the American Constitution."

It seems to be an extremely narrow minded conclusion from a great thinker that completely ignores an even more flexible solution.....

Excellent post, FOFOA. Bankrupt On Selling, ain't that the truth. You know, I might be the only one on this, but I'm dying to point out the fact that this is the first time you've posted a song that mentions the word gold in the lyrics. I'm pretty sure it's the first anyway -- apart from that time when you posted a link to Kaile's Gold. ;-)

The Financial Times has an article on gold leasing which you can read at GATA if you don't have access to ft.com:

http://www.gata.org/node/10893

They say, following the recent GFMS study, that in the second half of 2011, CBs lent gold to the commercial banks which they then used as the collateral in order to borrow Eurodollars in the market. If true, this would explain the drop in the lease rates that some claim can be observed.

I am tempted to say 'what a nonsense', but then I do not have the data to prove the FT wrong.

I think it is nonsense because I cannot see which CB would have an advantage from this policy:

1) For a CB in the eurozone, a funding crunch in the eurodollar market is not a primary issue. A funding problem in Euros would be a concern, but a eurozone CB can afford to be agnostic about the eurodollar market. It is mainly the derivatives market in London that depends on it whereas a funding difficulty in euros would affect the real economy. Even stronger, the ECB people might see the eurodollar market being squeezed, lean back, take out the popcorn, watch and smile.

2) For the Fed, it does not make sense to lend gold to a commercial bank because they can lend dollars right away. So why waste the gold. Yes, the Fed might want to lower the price of gold and lease some, but not for the commercial banks to secure eurodollars.

3) Well, now that I think about it, for the BoE it does make sense. They need to keep the London banks alive. They don't have the euro which can survive when the dollar goes away. And they cannot print dollars. Poor BoE.

In any case, if someone lent gold to the commercial banks during the second half of 2011, my guess is that the physical was moved and is on its way to Asia.

PS: The FT article I just linked, brags about negative lease rates, and so author Jack Farchy obviously does not understand what he is writing about. Have not come across that chap before - must be new.

He says that around the end of November, physical gold was sold into the market as part of a swap in order to obtain US$. Jaitly says that the other leg of the swap, namely taking delivery of gold on the futures contract in early 2012, should lead to buying pressure in the physical market.

Who sold the physical gold? I guess it was commercial banks? Why? Funding pressure in the eurodollar market sounds plausible. Whose gold did they sell? Their own (at least the gold they had at that time). Still no indication, any CB gave it to them for that purpose.

Hi FOFOA,Another fine article. Thank you for all the critical thinking!It has been a long time, but if you’d allow, I would like to share a thought to keep the readers thinking of the bigger picture. That is…Why must gold flow? … Short answer: To support the currency.The value is not in the taxation of the revalued gold or in the gold itself (very small $).The value is with the ability to print currency (huge $). In a Freegold system, any move that is seen as to reduce confidence in a currency will be avoided by that currency management at all costs. The goal is to increase your currencies functioning area and its carry trade! The larger your currency carry trade zone the larger the non-citizen tax base for that currency (inflation tax) and the larger the political influence. There will not be any need to smuggle anything. There will be no black market. Saving in gold will be encouraged rather than forbidden. Holding gold will be seen as a good thing!Freegold is not so much about gold as it is about currencies!Stand strong my fellow advocates for gold is just along for the ride!Ender

I don't know whether someone has already mentioned this one: Saudi Arabia raises what they call the 'fair' price of oil from $75 (announced in 2008) to $100 - this is before any official OPEC decision. Second, they say that can cover the shortfall if the Iranian production goes offline (as Jim Rickards claimed in his interview last weekend):

The best part of the FT article is what the author thinks is the reason for the move:

The International Monetary Fund estimates that Riyadh needs at least $80 a barrel to balance its budget, up from about $50 a barrel in 2008. Only a decade ago Saudi Arabia was able to balance its budget with oil prices averaging $20-$25.

Saudi Arabia is not alone. The fiscal break-even price for the United Arab Emirates, Iran and Iraq has also risen to between $80 and $100 a barrel, according to IMF estimates. Mohammed Al Hamli, UAE oil minister, last year told an industry conference that the “reasonable” price for oil was between $80 to $100 a barrel.

This is a bit off topic, but I came across the minutes from the bilderberg conference from 1973 which I think was released by wikileaks. Pretty damn fascinating stuff.

The conference starts by reviewing two papers discussing energy dependence on the middle east and the conflicts that are arising from huge balance of payment distortions and the "unearned money" accumulating in "backward nations" in the gulf.

These papers are the first thirty pages of the minutes and it gets very interesting around page 15 or so. At page 30 the bilderberg participants launch their discussion, with participants identified by country only. The first commenter addresses 4 major concerns of middle east oil dependence. Number 2 is the following:

"The threat to the availability of supplies, coming not only from the producing countries' legitimate Interest in conserving their principal reserve, but also from their disinclination to take oil out of the ground in exchange for money which they did not need and whose real value was declining."

This is as far as I have come as its way past bed time, but here is the link. Unfortunately it is uploaded page by page which is sort of annoying, but I couldn't find another source.

CEPII - What international monetary system for a fast-changing world economy?

"Though the renminbi is not yet convertible, the international monetary regime has already started to move away from a 'hegemonic' system centred around the US dollar. It is likely to move towards a 'multipolar' system, with the dollar, the Chinese currency and the euro as its key pillars. This shift corresponds to the long-term evolution of the balance of economic weight in the world economy. Such an evolution may mitigate some flaws of the present (non-) system, such as the Triffin dilemma or the asymmetry of adjustments. However it may exacerbate other problems, such as short-run exchange rate volatility or the scope for ‘currency wars’, while leaving key questions, such as global liquidity provision, unresolved. Hence, in itself, a multipolar regime can be both the best and the worst of all regimes..."

"The world should re-look at valuing their currencies against the precious commodity instead of the US dollar, Dr Mahathir said at the International Conference on Global Movement of Moderates dinner yesterday."

"You don’t really have to exchange gold but to value your currency against it."

"There is an acute need for ambitious multilateral responses to the systemic crisis of international currency and finance. But does such acrisis not constitute an inevitable transition for allowing the redistribution of power and responsibility among declining and emerging powers? A multipolar world needs a strong multilateral base so as to make it economically more fair and effective and geopolitically more stable. China’s option will be decisive. The world is waiting for China."

[Mrt @Costata: Remember the paper I posted about from Delors speaking about China?]

"...The current IMS – let us call it Bretton Woods II (created after the breaking up of Bretton Woods I inAugust 1971 because of the decoupling of the dollar from gold) – is going through an ultimate transition whose end, a Bretton Woods III, is not yet in view; meanwhile it is gradually shifting from a dollar-based to a multipolar currency system..."

"...Bretton Woods I was both an experiment in multilateral governance with the International Monetary Fund (IMF) and the World Bank (WB), and the consecration of the USA as the Western hegemon. It brought together an exclusive club of mostly Western and Northern States with close characteristics: a comparable level of development and, most of them, like-minded countries with regard to the tenets of the market economy. It marked a definitive break with the Gold Standard since currency convertibility was based on fixed but adjustable exchange rates pegged also to gold but through the dollar and last but not least, allowing capital controls. The IMF provided the institutional framework for the IMS and ensured assistance to countries in need. Policy-wise, the IMS rested on two pillars: trade liberalisation through GATT negotiations, and domestic full employment policies. For this reason, it received the appellation of “embedded liberalism” which amounted to “the multilateralising” of Roosevelt’s New Deal which in Europe took the form of the Welfare State.Bretton Woods I indeed proved a success which culminated in the “Glorious Thirties”. But its growth and welfare achievements mostly benefitted Western advanced economies that succeeded in retaining the three main benefits attached to the colonial and later post-colonial rent: low commodities and energy prices, a monopoly over manufacturing and captive markets for their exports. Today the rise of China and of the BRICS is definitely putting an end to the post-colonial rent. This is a sea change for Western economies confronted with manufacturing outsourcing and off-shoring and with new terms of trade with commodity producers..."

As far as I understand it the BB's are short gold as fractional reserve gold banks. The unallocated depositors can be settled at net dollar value on deposit as unsecured creditors of the bank in the event of a bank run on the gold deposits.

Reading back through some of Aristotle's posts (and my apologies if my analysis of those words is bad)I came to discover that the gold price is controlled on the short side because the longs are playing a leverage game and generally cannot match the resources of the short players to take delivery.

In the event that the long players do put excessive pressure on the shorts by putting up more funds than anticipated to take delivery the gold banks can support additional downward pricing pressures of the shorts in response by taking on additional leverage to their fractional reserve base and making gold available.

Take this a step further and you can presume the CB's historically step in to supply gold in the event the fractional reserve system also becomes stretched to the breaking point.

If that has truly stopped and CB gold is now lying in wait for revaluation as opposed to providing credibility to a dollar centric currency system then I suppose you could crash the brokerage house of some major counter parties and do things the messy way, but that's pure speculation.

But I guess my question is really how is it that such leverage could exist in the market if the BB's and large futures players are not net short?

"If we are right that the BBs just engage in borrowing and lending, but have no price risk themselves, i.e. are not short gold in US$, then this is only a quetion of liquidity."

What about fractional reserve BB, as AN brings up? Where does that fit?

If there is a run on BB reserves, then the BBs will have to go out into the market to buy them, right? Wouldn't that run up the price, and cause large BB losses, even if the BBs were technically $gold-price neutral on paper?

Wouldn't it be funny if the CB gold sales of the late 90's and early 2000's were to cover leases that proved unrecoverable (hence no physical moved), and the current CB gold purchases are the re-purchasing of the same gold, which never actually left the vault?

burningfiat,

"But wouldn't gold still keep its utility as "store of value" as long as some individuals produce more than others?"

That is a good counter. Even if imbalances between countries / zones even out, there will always be imbalances between individuals.

victor,

(quoting):"The International Monetary Fund estimates that Riyadh needs at least $80 a barrel to balance its budget, up from about $50 a barrel in 2008. Only a decade ago Saudi Arabia was able to balance its budget with oil prices averaging $20-$25."

Is this the start of an inflation spiral? An oil-price spiral instead of a wage-price spiral.

ZH: China Brings US Treasury Holdings To One Year Low, Russia Cuts Treasury Exposure By 50% In One Year

Can anyone shed a bit of light on this? I've learned to take ZH's interpretation of events with a grain of salt.

If foreign holdings of treasuries is declining, where are they going? QE-lite is ongoing; how does the decline in foreign holding compare to the amount of treasuries the Fed is adding to its balance sheet?

Ender: -Well, there's a familiar "handle" ...X-USAGold forum per chance?It will be like old times when Sir Ari rears his ugly (but loveable;-)head again ...and the timing couldn't be better IMO as the Maginot Line of Zero% morphs into a Fiat-Systemic Rubicon.

I agree with FOFOA that there will be no gold tax on physical, but there very well may be on paper forms of gold like miners and ETFs. As he said, the gold must flow. There is very little bullion or coins in the hands of the public, but there is a lot of gold out there in the form of jewelry. If they tax it when Freegold arrives, it will go to ground. If they let people melt grandma's ring for cash, it will flood the marketplace with gold, which will eventually end up in the banker's vaults. The gold must flow.

If there is a run on BB reserves, then the BBs will have to go out into the market to buy them, right? Wouldn't that run up the price, and cause large BB losses,

It would run up the price, sure, but if the BBs are not net short (as we have assumed so far), then they wouldn't lose anything.

If there is a run on the BB, they could swap US$ for physical gold in the market, i.e. buy gold at spot and sell the forward. This is done without assuming any price risk - the only thing you need is US$ liquidity, and the Fed can take care of this if they want.

There is a second order effect though, and this is GOFO, the amount you earn or have to pay for this swap. As long as gold is in contango, the BB even earns interest if they borrow physical gold for US$. Only when gold goes into backwardation and remains in backwardation permanently, the BBs will have to keep paying interest in order to hold the physical gold that they borrow from the market.

This is why Antal Fekete has always stressed that permanent gold backwardation would be the end of the US$.

Wouldn't it be funny if the CB gold sales of the late 90's and early 2000's were to cover leases that proved unrecoverable (hence no physical moved), and the current CB gold purchases are the re-purchasing of the same gold, which never actually left the vault?

I think it is true that the CB sales after the Washington Agreement, i.e. between 1999 and around 2009, were sales of paper gold that had already been lent.

But I don't think it is true that the gold never left the vaults. From the FRBNY vault inventory, we know that in the 1990s, about 6000 tonnes (if I remember correctly) that was owned by non-US CBs and international organizations, left the vault. According to Frank Veneroso, another up to 14000 tonnes of forwards were still open in 2002 (again if I remember correctly). Most of that would have been forward sales by the mines, i.e. paper gold loans taken from BBs plus hedges. As far as I understand, these were wound down in the period from 2000 to 2006. Just look at Barrick Gold, for example.

I don't know whether any CB paper leases were open after 2002 that were not closed by officially selling the gold that the CBs could not recover from the BBs. At least, we know that no significant quantity of physical gold left the FRBNY vault after 2000.

So I expect that the recent CB purchases are either paper (good luck if your counterparty is the BoE), or they have been purchased in the spot market for physical gold. 400 tonnes in 2011 is not that much after all. It is less, for example, than the amount of retail bars and coins that is sold every rear.

Is this the start of an inflation spiral? An oil-price spiral instead of a wage-price spiral.

I though this is bullshit. The Saudis cannot get a lot of gold right now (perhaps they are still getting some old forwards filled and have agreed not to purchase anything beyond that for a while?), and so they buy all sorts of fun gadgets with their petrodollars.

If foreign holdings of treasuries is declining, where are they going? QE-lite is ongoing; how does the decline in foreign holding compare to the amount of treasuries the Fed is adding to its balance sheet?

I think the source is this table

http://www.federalreserve.gov/releases/h41/hist/h41hist9.txt

the US$ bonds (treasury, agency etc) held by the Fed on behalf of foreign CBs. Well, we know that the Fed buys long term bonds and sell short term bonds as part of their Operation Twist 2. This allows foreign CBs to sell long term US bonds while all sorts of investors purchase short term bonds because these are considered 'safe'.

1. So far, the price attacks we have seen on PMs have all been tempered by the requirement that the manipulators not break the price suppression mechanism and decouple paper from physical prices. In other words, if they overdo it, the can kicking stops.

2. When the end comes and they are about to devalue fiat against the SDR, and tie the SDR to gold, they won't have to stay their hands with worries about decoupling gold prices, because the can kicking will already be over.

3. Therefore, before the devaluation and Freegold, TPTB will use up their remaining margin hikes and drive down PM prices as fast and as far as possible. This will include currency manipulation by central banks, rumors and announcements, along with a dramatic collapse in equities to create a riptide effect and drag PM prices out to sea with everything else(and shake loose shares at bargain prices).

4. The above three observations are based on the modus operandi and are well within the abilities of the insiders, and to think they won't do it when the great reset is pushed, naively assumes that they will leave easy money on the table.

UNLESS there is a spontaneous collapse of the system which beats them to the punch, it is in self the interests of TPTB, and their insider friends, to bring about much lower equity and PM prices before we devalue and ramp gold and silver to the sky.

a) the transition comes surprising and lightning fast b) the slow death of the old system drags on for another decade"

The problem is debt levels, leverage, and derivatives. All three are increasing, not muddling through. For example, global derivatives increased 15% in the last 6 months. That's $707 trillion in a world where global GDP is @ $65 trillion. With a 30% year over year rate of increase, how long do you think we have? (Hint: It's not decades)

I give it until the end of March before we have to push the reset button.

Read IMF Chief Economist Oliver Blanchard's end of 2011 speech about what it will take to muddle through. Even he doesn't believe it. At this point, he says the kind of austerity measures you need would damage growth and further spook the bond purchasers. If you heed the tone of the speech, he obviously doesn't see muddling through as likely.

During the second half of 2011, there was a huge price difference between Brent (spot North Sea oil for delivery in Rotterdam) and WTI (lighter crude oil for delivery at Cushing/Oklahoma). At basically all ports, the price for spot crude oil is close to Brent because you can send a tanker there and arbitrage against Rotterdam. But not so in the mid west in Cushing. Why?

The answer is the Canadian oil sands that have been gradually coming online over the previous years. There is a pipeline from Alberta to Cushing, but the Canadians have no significant capacity to pump oil to the Pacific Ocean in order to export it.

They have a small pipeline to Vancouver if I remember correctly, but the large supertankers cannot go there. They are even filling railway tank cars and use trains in order to get their crude oil to the coast.

Canada is right now planning the 'Northern Gateway Pipeline' to Kitimat on the Pacific coast and to extend Kitimat to a deep water port, but completion of that project is still several years away.

There is one pipeline, the 'Seaway Pipeline' from Cushing to the Gulf of Mexico that could be used to arbitrage WTI against Brent. The pipeline used to be owned and run by ConocoPhilips, but they kept stubbornly pumping from the coast to Cushing, increasing the price difference rather than arbitraging against it.

In December 2011, however, Enbridge (Canadian company) acquired a majority interest in the Seaway pipeline and immediately announced that they would switch the flow to pump from Cushing to the coast. The price gap between WTI and Brent started to close.

The Seaway Pipeline, however, is also too small in order to get all the Canadian production to the coast and to export it to overseas.

This is why Enbridge are trying to get planning permission for a larger pipeline, 'Keystone XL' (extending their existing Keystone Pipeline from Canada to Cushing further on to the coast).

Now think about a possible conflict with Iran and a possible partial closure of the Straight of Hormus. The USG would1) make Enbridge shut down or reverse Seaway2) refuse plassing permission for Keystone XLand thereby keep the Canadian oil trapped inland for several years, in particular rendering WTI substantially cheaper than Brent for the duration of the conflict.

FOFOA, you dismiss the confiscation threat a bit too rashly. You seem to presume the authority issuing the confiscation edict will be rational when you say, "I'd like to discharge the confiscation meme once and for all. Physical confiscation only makes sense if you are going to confiscate the gold and then, and only then, nominally revalue it yourself hoping that your currency is strong enough that a nominal revaluation actually delivers you a real windfall..."

When Stalin and Hitler confiscated gold it was to take purchasing power from the people and FORCE them to use money printed by the state which they could print at will. They were jealous of the power gold held. Nominal re-valuation was not their primary motivator.

The gov't might also attempt a two-tiered currency system after the USD collapses -paper script for the domestic serfs and gold for their own int'l transactions. This would be another motivation to try a confiscation.

"If there is a run on the BB, they could swap US$ for physical gold in the market, i.e. buy gold at spot and sell the forward. This is done without assuming any price risk - the only thing you need is US$ liquidity, and the Fed can take care of this if they want."

This assumes that the run on BB reserves is 'transitory', correct? What if those deposits request allocated, and unallocated balances never recover? I suppose that is what leads to ...

"Only when gold goes into backwardation and remains in backwardation permanently, the BBs will have to keep paying interest in order to hold the physical gold that they borrow from the market."

What would this look like? If I have it right, then future gold would be cheaper than spot gold, and for some reason the arbitrage of selling spot and buying future will be unattractive (possibly due to counterparty risk, as you have written).

The bank would face losses due to interest expense. They could either go bankrupt or try to make it up elsewhere in their operation. Maybe they will try to increase profits by hiking storage fees for allocated? But then maybe deposits leave and don't come back.

Maybe they'll start paying interest on unallocated accounts? But where will the money come from.

Still thinking through this scenario.

"So I expect that the recent CB purchases are either paper (good luck if your counterparty is the BoE), or they have been purchased in the spot market for physical gold. 400 tonnes in 2011 is not that much after all. It is less, for example, than the amount of retail bars and coins that is sold every rear."

Yes, I agree. I just thought it was an interesting thought experiment.

Are you referring to this article or have you read the whole archive of FOFOA's when to accuse FOFOA of treating the confiscation meme "rashly"?

On the contrary, it's apparent to me, having read all his posts atleast once, that FOFOA has given confiscation quite a bit of thought.

In 1971 the US defaulted on foreign creditors by closing the gold window. He has postulated that that act was a severe blow to the credibility of the US gold hoard (it refused to flow). Why, after such behavior, would foreigners think they will get contractual performance this time? Secondly, who do you think will be the biggest beneficiaries from the ongoing gold revaluation? Hint: it will be the very people who will have influence over such a policy. Jim Sinclair has alsoindicated this many times.

I don't believe short end "investment" in T's is motivated by safety per-se, rather more a case of capital guarantee.

When all is said and done, would YOU pay $1.30+ for a $1 Long-Bond with the ever-present "swords of Damocles" (aka lack of liquidity and / or monetisation) poised to drop at any moment?Prior to c$1.24 one could "cover" the position with a put/call however, beyond (higher than) that, they've looked shaky ...and hence are shunned in the Market-place.

Globally, the Punters are flocking to the short end in droves, driving down to Zero Yield ...and beyond! ...where GOLD - the hard version, awaits - patiently.

Greetings Sir Topaz, Yes & I miss your old website.I’m curious what has consumed Sir Aristotle’s energy for the last decade. Yet, I am pleased to see all the energy FOFOA’s commenter’s have invested in understanding what is coming our way. When one realizes the truth, the pieces of the puzzle all just fall together.Ultimately, life is enhanced when you are able to share it with great thinkers and doers!Carry on – my tinfoil friends!

Thanks for the insight on the WTI/Brent spread. Very enlightening and something I was wondering about for a while.

I'm lost on the non net short comment though. Who do you sell a forward to in the middle of a run on your/the gold reserves? The CB? Is this what you mean by what couldn't be recovered in the past CB deals? Also, did I miss an earlier comment where this neutral futures position was established? Trying to play catch up as I think this matters.

My prior understanding was that BB's use gold to create dollar liquidity by selling short up to the point of their reserves remaining credible in the current IMS and that this mechanism would be broken in the event they were called on claims outstanding to a large enough degree. Backwardation/Gimme mine now. Either way.

No different than a dollar bank run except you need to come up with gold you don't have due to fractional reserves versus central bank IOU's which can and will be delivered on demand.

What is the point of establishing 200 to 300k futures contracts that are evenly matched? Is it akin to selling faulty default and rate insurance on mispriced bonds or something to do with managing gold flow in a fractional reserve system?

Why are derivatives exploding as USG bond yields stay sub 2% and yet COMEX open interest is 20-30% off its' peak while the gold price marches higher? The answer to both is the same, but why would it be occuring, if nobody is offsides and exerting pressure in the gold futures arena?

I'm obviously missing something, but certainly appreciate any time you take to cover this and all of the first hand knowledge you have been kind enough to pass on along the way.

Ender: -Ari's "coin here, coin there as excess production allows" mantra will be well received here ...and yes, FOFOA's excellent efforts, together with his top-notch "following" provides a welcome respite from main-stream commentary.

Perhaps this is semantics but the "price suppression mechanism" idea bandied about by PM pumpers is a bit misleading and one that can set you down the wrong path.

"1. So far, the price attacks we have seen on PMs have all been tempered by the requirement that the manipulators not break the price suppression mechanism and decouple paper from physical prices. In other words, if they overdo it, the can kicking stops."

IMO understanding this issue is key to getting the right perspective on paper gold IMO, and I think maybe there is more nuance than expressed above.

I am sure you understand this intuitively, but most "gold suppression" analysts fail to make the distinction between: 1. a suppressed gold market and 2. managed gold price movements. One is automatic and the other is controlled or manipulated.

The paper gold market automatically suppresses the price of gold by some multiple, perhaps 50. Meanwhile, the banks mess with short term technical fluctuations for profit. Most analysts think #2 causes #1. But the way I look at it, the CBs helped create #1 and then allowed the investment banks to do #2 (perhaps a decade later) for profit. The two are becoming less and less compatible (an explosive combination) as the dollar nears its end.

I think using a term like "the paper price suppression scheme" combines and confuses two very different factors.

New liquidity can only be created through gold as long as real physical gold is willing to bid for dollars somewhere in the world. This is why the dollar must depreciate against gold, to coax fresh gold "stock" into bidding for dollars! (ANOTHER taught us that gold prices dollars, and then dollars price everything else.)

In the past, the CBs supported this process with guarantees of their own gold (to bid for dollars). But today they are less willing to do so. Only unencumbered physical gold can be fractionalized, and only as long as people are willing to buy golden tickets in lieu of the real thing.

If you lease me an ounce of physical gold, I can safely sell 10 golden tickets knowing that only 10% will come for delivery. And most of the time, I can get my hands on more ounces from the private sector so I never have to come ask you for that physical ounce. (You leased it to me, but you held it for safe keeping) At some point you will stop leasing to me, I won't be able to get more ounces from the private sector, and more than 10% of my golden tickets will demand delivery.

At that point I'll come back to you for the physical and you'll just print up some euros to pay off my golden tickets rather than giving out physical ounces. Why? Because golden tickets NEVER WERE worth real ounces. It was all just an illusion of liquidity. Real liquidity is and always has been "that which you cannot print", "that which is tradable outside your zone", "that which is hard, not easy, to get".

Reading back through some of Aristotle's posts (and my apologies if my analysis of those words is bad)I came to discover that the gold price is controlled on the short side because the longs are playing a leverage game and generally cannot match the resources of the short players to take delivery.

As I noted here last Friday, during the dark of Thursday night, euro gold mysteriously levitated itself up a whopping €32.89 from Thursday's London PM fix of €1,184.16, which would have been a disappointing decline since the October MTM Party which marked gold at €1,206.39. This, of course, begs the question (once again) that was implied in this post as to how important "Snapshot Day" really is to young central bankers. (Evidence from Sept. '10 and April '11 seems to suggest that year-end and mid-year might be more important than the other two quarters.)

But this is neither here nor there which is why I put it in a silly little sidebar. It is simply a curious observation.

"What if yesterday's "dip" was not the result of a coordinated pounding, but from the abrupt and unexpected absence of certain "giant" "longs"?

Why did paper gold hold its own all through June -- at or near its ALL TIME NOMINAL HIGH -- only to drop off a small cliff on July 1st as if one of its main support pillars called in sick for the day?

Were the "commercials" REALLY just waiting to turn the calendar page before pounding the snot out of gold? Or were certain "giant" LONGS propping up PAPER GOLD to book important numbers... on an important day? And if so, what does this imply about the real PHYSICAL prospects for the paper gold market going forward?

As long as the "paper gold" price is imputed widely to all pieces of real physical gold held tightly in vaults, it is fairly important to certain... how shall I say... published reports? Yes?

@JR (I already posted it but anyway):ECB - The number of monetary financial institutions in the euro area and in the EU decreased further in 201116 January 2012 - The number of monetary financial institutions in the euro area and in the EU decreased further in 2011"On 1 January 2012 the total number of monetary financial institutions (MFIs) [1] in the euro area stood at 7,533. This is a net decrease of 332 units (4%) in comparison with the situation a year ago. With a few minor exceptions, the decline was spread across the whole of the euro area. There were 9,587 MFIs in the European Union (EU) as a whole, a net decrease of 334 units..."

"On the other hand, gold and silver in the ground could face an entirely different treatment, but he seems to be saying that gold in the ground could be heavily taxed, whereas they would not be able to do so with silver because of the industrial demand. This made sense to me and suggests that silver miners are preferable over gold miners."

Who do you sell a forward to in the middle of a run on your/the gold reserves?

Not to me. I want the real stuff. You see, this is why the term structure would invert and why you would get backwardation - everyone buys the physical, but the forward is considered too risky and therefore trades at a discount although cash yields a positive interest rate. Yes, the swap always has some counterparty risk. When the counterparty risk on the gold is greater than LIBOR + storage + counterparty risk on the US$ component, then you get backwardation.

This is one reason why I find silver interesting. The mechanics of the market are similar: trading by the same BBs, huge amount of unallocated (see LBMA clearing statistics). LBMA clears about 170mm oz of silver (=5200 tonnes) every day. Annual production is about 850mm oz. Do you think LBMA clears only physical silver? They would turn over the global annual mine production within 5 trading days. Pretty exactly the same figures as with gold (daily LBMA clearing about 620 tonnes, global annual production is 3000+x tonnes.).

But silver has been in or near backwardation for a full year now, starting in Jan 2011. These days, again there is no contango beyond 1 month, i.e. nobody is willing to sell 1 month silver and to buy it back in 1 year (say) through the forward. Is this because they are not sure they get the silver back, or is this because they don't want to hold US$ in the meantime??

It is true that presently there is still sufficient physical silver available in the spot market (Sprott, Turk and Co keep telling you lies). But something is broken in bullion banking. Could it be that the silver market is giving away something that the CBs (the Fed??) can still paper over in the gold market, but not so in the silver market?

Does everyone in bullion banking expect short term nominal (!) US$ interest rates to turn negative in the near future? Why does the gold market not react in the same fashion?

Smiddywesson,

So far, the price attacks we have seen on PMs have all been tempered by the requirement that the manipulators not break the price suppression mechanism and decouple paper from physical prices.

The funny thing is that during the price drop after Sept 2011, there has always been enough physical gold available in the spot market.

This is different from what happened in 2008. In 2008, all the speculators were selling their paper gold once the famous long-gold versus short-banks trade became impossible or once they had to cut down on their leverage. In my opinion, this is what caused the gold backwardation in late 2008 to early 2009: paper selling by speculators versus buying of physical by fearful investors. The BBs had to react by borrowing physical: purchasing physical at spot and selling the forward (note: they do not assume any price risk when doing this).

I think you need to look at total assets. For example, the US banking industry has seen lots of consolidation, perhaps similar trends are at play in Europe. Are there less MFis in a material way, or have some MFIs been absorbed into larger MFIs? I dunno.

also: "Note: The reduction in the number of MFIs during 2011 largely resulted from the introduction of a common definition for European money market funds (Guideline ECB/2011/13), which led to the reclassification of certain funds formerly recognised as money market funds."

Yes, I have read all of fofoa's posts at least once. I have been a reader/fan since the beginning. However, I think the issue of confiscation is a chink in the freegold armour. FOFOA's anti-confiscation arguments seem to address how a rational gov't would act and react. A tyrant likely would not care about nominal revaluation. Tyrants crave power and the domination of others. Objectively looking at the recent actions in Congress and Executive would cause an observer to consider such an outcome.

"FOFOA's anti-confiscation arguments seem to address how a rational gov't would act and react. A tyrant likely would not care about nominal revaluation. Tyrants crave power and the domination of others. "

I don't think you understand, this is in effect FOFOA's argument. Perhaps you are blinded by a misunderstanding of how the "tyrant" in question maintains power:

"Gonzalo correctly points to "palliative printing" as a wheelbarrow-enlarging event, which comes at the very end stage of a hyperinflation. And he presents it as palliative to the people. But this printing is usually most palliative to the government and its expanding rank of stooges. Sure, there will be "welfare" along the way, but for the most part the freshly printed cash will buy the most goods and services for the first hands it touches. And then less for the second. And even less for the third and so on. And this prime purchasing power will be mostly reserved for the government that prints it. ""

"Soldiers don't fight without a paycheck that at least buys an apple. Even the stooges won't show up for work. And I'm talking about buying an apple at the market where apples are actually being sold. Not the government bread-lines for those with inflation protected food stamps, where you can "afford" all the food your family needs except that there's not enough to go around.

What you think of as the big domineering federal government is nothing without public confidence in its currency, the physical dollar. And confidence is one thing it CANNOT force. Confidence is the ONE thing that must be earned. The entire federal government operation from Pelosi to Private Benjamin will stop on a dime the minute it can't pay its stooges in inflation-adjusted terms."

"In parts two and three of my September hyperinflation posts I explained how the US government MUST respond to a currency collapse by printing more currency in order to keep its stooges doing its bidding."

The USG may be a dealer in the monetary plane, but it is most definitely a sketchy junkie in the physical plane. The USG thinks (and truly believes) that the key to rejuvenating the US economy is trashing the dollar as a short cut to increasing exports (reducing the trade deficit). But what it can't see (nor anyone that focuses solely on the monetary plane for adjustment) is that the huge trade deficit the USG wants to quit is actually its own heroin fix. This is a deadly combo for the US dollar.

[...]

So the US private sector is actually living below its means by $835B if we isolate it from the government sector. The government sector, on the other hand, is living way above its means with 60% domestic support and 40% foreign support. Stated another way, the US private sector is providing the USG with $835B in goods and services in excess of taxes, or 60% of USG's "deficit consumption."

Viewed this way, there's only one way to reduce that trade deficit (inflow of free stuff): reduce the size of the USG monstrosity. Unfortunately, the USG is totally incapable of voluntarily shrinking itself, especially because it issues its own currency! The real problem, the heart of the matter, the reason why the dollar will and must hyperinflate, is that the US trade deficit, on the physical plane, is structural to the USG who issues its own currency. Simple as that.

[...]

I want to try a little word replacement game with Wray's Weimar description. Let's replace Germany with the USG and the war reparations debt with a trade deficit addiction and see how it looks. Other than these few substitutions, I'll leave Wray's descriptive words alone:

"The USG had endured 30 years of foreign-supported trade deficit and developed an addiction to free stuff. To make matters worse, much of its productive capacity had been shipped overseas during this time period. The US private sector could not possibly support the USG’s addiction to real goods.

The nation’s productive capacity was not even sufficient to satisfy domestic demand, much less to support USG demand. Government knew that it was not only economically impossible but also politically impossible to impose taxes at a sufficient level to move resources to the public sector to satisfy the USG’s insatiable addiction. So instead, it relied on deficit spending through raw base money creation. This meant government competed with global demand for a limited supply of importable goods—driving prices up. At the same time, the US private sector had to pay the same higher prices without the benefit of issuing its own currency to buy needed imports. Rising import prices forced the US economy to consume more of its own domestic goods, which increased USG’s reliance on imports, and since foreign imports cost more in terms of the domestic currency, this increased the cost of the USG’s addiction in terms of domestic currency." (Me)

Now I want you to think especially hard about that last line, "…this increased the cost of the USG’s addiction in terms of domestic currency." This is the key to understanding why we are headed toward all-out, balls-to-the-wall, in-your-face wheelbarrow hyperinflation. This is it, the point I'm trying to get across to you.

That inflow of free goods that is structural to the status quo operation of the US government is more dangerous to a monopoly currency issuer than the war reparations debt in Weimar Germany. The USG is incapable of reducing that inflow of real goods voluntarily and so the non-hyperinflation of the dollar requires it to flow in for free. And it has been, up until recently.

"Think about a debtor who owes a hard debt to a loan shark versus a junkie who owes a regular, ongoing, hard fix to himself. Which one is worse off? Which more desperate? As I wrote above, this intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation!

Big Danger in "A Little Inflation"

I just received an advance copy of Jim Rickards' new book, Currency Wars (thank you Steve and Jim). And while I haven't had a chance to read it yet (because I've been working on this post), I have it on good authority that Jim thinks the Fed is actually targeting 5% annual inflation right now while saying 2% or a little more. This sounds credible to me.

So what's the danger in a little inflation?

If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

One of the strongest arguments that the USD will not hyperinflate like Weimar or Zimbabwe is that the USG's debt is not denominated in a foreign currency. If it were, this would be a different kind of hyperinflationary feedback loop we were facing. If all the USG debt was in a foreign currency and the dollar started falling on the foreign exchange market, that debt service would lead to hyperinflation. But that is not the case. So it’s not the FX market (monetary plane) that is the big danger to the dollar.

The dollar is the global reserve currency, so it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany.

As the German Mark fell, there was "not enough money" to pay the debt. And with a little inflation, there is "not enough money" to buy our necessities from abroad."

So they need stuff, they will in fact hyperinflate the dollar in pursuit of this quixotic thirst for power.

So after the dollar collapses, why would you expect them to do a 180 and completely change? They won't change, they will be the same, and thus they seek the thing.

See why Ender wrote "The larger your currency carry trade zone the larger the non-citizen tax base for that currency (inflation tax)..." above?

================================

Do you understand FOFOA's point that "with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital?":

In this scenario, the need to continue printing in the face of an ongoing currency collapse will obliterate any miniscule gain that comes from the few shrimps who actually decide to sell their gold in an untimely way and pay the tax. The US has precious little gold in private hands as it is. And it will need that private gold to flow. It needs you to sell your gold to your dealer so your dealer can export it to our trading partners. That's how trade flows will resume under the new paradigm, with savers choosing to let their gold flow because of the amazing purchasing power it delivers.

And with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital in its purest form based on the silly notion that the hungry collective deserves a windfall nine times greater than the gold investors who kept gold inside the zone through a turbulent transition. The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

Hi JR. I suppose I have a difficult wrapping my head around what would cause our contemporary regime from acting differently than other recent totalitarian regimes have reacted toward gold. The 'rich' are constantly being attacked by the regime. What would cause one to believe they would react positively toward those who delayed gratification and saved their wealth in gold? They would say such a windfall is 'unfair' and those 'folks' who 'got lucky' must 'pay their share.' This is especailly true given the politcal leanings of most PM owners. Have your ever seen a gold commercial on msnbc? I haven't, but see/hear lots of them on Fox and conservative radio shows.

This is all the language of the left. As an example of the irrational behavior of tyrants, they (the leftists) know full-well raising taxes result in less revenue to the state. However, they choose to play the political card of the rich not paying their fair share and demand they pay higher rates. They don't really care it results in less revenue. In other words, they are not acting like a rational profit maximizer would act.

Can you help me understand why it would be any different here when the stuff hits the fan?

Do you understand freegold is different than what we have know, and is different from what we have had? Because your argument fundamentally assumes there is no difference. So as you can hopefully see I can't really help you at this juncture until you help yourself.

Taxing makes it flow less, but the USG will need it to flow. The USG will be forced to cry uncle if it tries to tax gold, because that will kill the flow they need:

"Part of our premise in this exercise is that Freegold has arrived, along with everything that comes with it. So even though the USG has misstepped and put on a 90% gold tax, the rest of the world has not and is now enjoying a technically balanced trade flow along with the reappearance of Jacques Rueff's "forceful but unobtrusive master, who governs unseen and yet is never disobeyed."

Let's ignore hyperinflation for now and talk in constant dollars. Gold now has the purchasing power of $55,000 in 2012 constant dollars. Your gain per ounce is roughly $53,500 and the government wants 90% of that money, or $48,150 leaving you with only $6,850 worth of purchasing power for every coin you choose to sell. Meanwhile, those strong hands in other Freegold countries have $55,000 in purchasing power for each coin they choose to sell.

Strong hands in the USA have $6,850 in constant dollar purchasing power. Strong hands in the ROW (rest of the world) have $55,000 in purchasing power. The gold must flow, but will it flow from the USA as much as from other deficit countries under these conditions? If it does flow, it will still flow across international borders at the new Freegold value and vital goods and services will flow back into the US. But only 12.5% of the purchasing power of that gold will go to the person with the choice of "to flow or not to flow" while 87.5% goes to the USG.

Tax laws always change, and this is a fact that will also be factored into the decision "to sell or not to sell" that strong hands in the US will face. Another factor is black market arbitrage. A strong hand in the US won't have to engage in smuggling gold out of the country himself in order to gain more purchasing power than $6,850. With $48,150 per ounce in potential black market profit (that's $1.5 billion per smuggled tonne), it's not hard to imagine a vibrant black market that would gladly pay you twice your $6,850 off the books.

So if the gold in private hands in the US doesn't flow in sufficient amounts, given that US debt has been discredited through the Freegold phase transition, the government will have no choice but to continue printing money in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people. And in a last-ditch effort to support its own failing currency, it will have to ship Fort Knox gold overseas. FOA mentioned something about this: "…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates."

In this scenario, the need to continue printing in the face of an ongoing currency collapse will obliterate any miniscule gain that comes from the few shrimps who actually decide to sell their gold in an untimely way and pay the tax. The US has precious little gold in private hands as it is. And it will need that private gold to flow. It needs you to sell your gold to your dealer so your dealer can export it to our trading partners. That's how trade flows will resume under the new paradigm, with savers choosing to let their gold flow because of the amazing purchasing power it delivers.

And with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital in its purest form based on the silly notion that the hungry collective deserves a windfall nine times greater than the gold investors who kept gold inside the zone through a turbulent transition. The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

I understand iceman's argument as follows: The Soviet Union never cared about how much economic activity they were able to tax. In fact, they suffered serious famines quite early on, but they were still able to hang onto power for some 75 years. That's quite a long time if you just plan to wait it out.

But instead, we're talking about a country whose currency just went from world reserve to poof.

The world's largest debtor sees its debt discredited through the Freegold phase transition and has no choice but to print out in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people, eventually shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates.

That's what were are talking about. A collapsing currency that needs private gold to flow to regain stability - and therefore regain the needed purchasing power to give to its stooges, to those it gives the money to first, to feed its fix.

I finished reading the 1973 Bilderberg conference minutes. After some dull parts regarding strategy for future energy production, accrual, and caching, it got interesting again. Here is an excerpt for anyone interested:

"A British participant said that our work in reforming the international monetary system should not be dominated by the oil issue. Conceivably, though, the Arab countries would benefit indirectly from whatever solution the Committe of Twenty might find to the problem of international reserves. Perhaps the recent rise in the price of gold reflected the Arabs' concern about the dollar. If gold advanced to three or four times its present level, as some people were predicting, the speaker would favor letting the producing countries "have all the gold in the world at that price, if they consider that a more adequate reserve."

As big as the monetary impact of the oil situation might become in the future, it would be "only a little addition - not much more than a tenth - to the deep mess which we are in already," according to a German speaker. "We have first to solve the basic mess and then see to the oil problem, and not in the other order." Unless the US soon took impressive steps to restore international confidence in the dollar, growing amounts of central bank reserves would be set loose - and not just on the fringes of Europe, where the process had already begun, but throughout the world. We would then have to deal with a Eurodollar market of $200 billion, twice as big as it was today.

The quality of American discussion of this problem, both at home and with governments abroad, indicated that few had a convincing grasp of its complexities. American legislators and lobbyists were talking about tariffs and non-tariff barriers to trade, but the effect of such barriers had been dwarfed by the currency devaluations and revaluations of the past six years. The US had not acted quickly enough to raise interest rates to attract funds from abroad, nor did it offer incentives for the repatriation of capital gains, which were held abroad "to buy more corprations in Europe and in other places." At the same time, Americans deplored the fact that Europeans did not help them them to overcome the gap in their trade balance.

Over the past several years, the US had become accustomed to consuming more than it produced, while "insane developments of structure" in Japan and Germany had led those countries to produce more than they could consume. Adjustments under the system of fixed exchange parities came too late or not at all. It was too early to say whether floating rates would work any better.

Unless confidence in the dollar returned, world monetary reform would be just "an abstract academic exercise." America's friends would help her, but first she had to set her strategy. Eventually we should work toward an international federal reserve system which could impose rules on foreign currency accounts. If the Euro-markets had been subject to regulation in the way that national banking systems were, things would not have gotten out of hand as they had done. It was important to recognize that the oil money question was merely a part of this much larger framework."

----

I'd love to see the minutes from the more current of these conferences of giants.

What matters most in the market is perhaps not where the price of your investment is going, but how you handle the journey to that destination, or the failure to get there. Operating with as much professionalism as possible is your key to success. Click this copper ultra-bull chart now. If you are a copper bull, I would advise you to look carefully at this chart.

You are looking at a massive head and shoulders continuation pattern, with an upside price target of at least $8-$10. I have long argued, almost alone, that the Dow would hyper-inflate as this crisis wears on.

The bottom line is that earnings don’t matter when money printing has enveloped the world. “Dr. Copper” is arguing strongly now that the Dow should indeed skyrocket.

Click this Dow Diamonds ETF chart. The same head and shoulders bull continuation pattern is clearly evident on this chart that you see on copper, and projects that the Dow could rise to 18,000. I think 30,000 is possible and probable.

http://www.kitco.com/ind/Thomson/jan182012.html

And later he cautions:

Still, the Dow has been crushing the dollar bugs for quite some time. Stock market prices are extended in the short term. A negative surprise in the Greek debt negotiations could see that wedge pattern activate, and rain on the “risk on” parade.

Whatever negative surprises may await investors in the short term, the longer term “risk-on” asset charts suggest a huge fall in the dollar is coming in 2012, and huge rise in almost everything else is coming as a result of that fall.

IMVHO it's time for the re-post of a splendid JR comment you wrote about Ben Bernanke's actual objectives. As opposed to cranking up the "money-multiplier" as is so often claimed by the debt deflationists. (I have been unable to find the comment.)

It dates to the period when we were chatting so amiably with our since departed friend Ash. Otherwise known as SIR, the sobriquet I bestowed on him in appreciation of his efforts here.

With this post Mish continues to promote the favourite myth of Team Photocopier (the debt deflationistas) regarding Bernanke's intentions.

Bernanke is trying every way he can to get banks to lend (printing coupled with a multitude of lending facilities and Fed programs).

It's easy enough to prove the printing: Base money supply is up about $1.8 trillion since the start of the recession.

The Money Multiplier Theory (an incorrect theory) suggests this money would be lent out 10 times over causing rampant price-inflation and GDP growth.

What makes you think mid Feb? I doubt you're throwing a random date out there.

I'm trying to hold off on making another purchase until late Feb or early March. I'm leaning towards June / July being the "reset" date but of course it could happen at any time. If you have a reason for me to deploy some cash sooner than that I'd love to hear it.

"Government will not tax gold, because it is not usefull and counterproductive"

And by now I guess we are all convinced that this is true.

But: Can somebody maybe name me the last action government or federal agency performed, that was reasonable?

Let me check about the last major actions in recent history with major effects on (world wide) society:- minimum wages- US war on drugs- US war on terror- Obamacare- QE to infinity & TARP- ECB purchase of bonds- EFSF and upcoming ESM- tobin tax (it will come in the EU)

Looking at this track record I really can not understand why some Freegolders insist that this time everything will be different, just because you consider it rational.

Perhaps that is what will occur with The Dow as per Stewart Thomson's commentary, but, since he's interested to some degree in chart formations, he might mention that The DOW, NYSE, and S&P 500 have formed a massive H&S top going back to 2010. It's pretty much a classic pattern with the left shoulder evincing the most strength and the right shoulder the weakest of them all.

I'm sure the boys in the PPT boiler room have taken notice, and will try to bust the pattern but, technically, and cycle wise, this has now become anything but a low risk market for longs. Thrown into the bargain there is evidence thatdistribution is underway to (what passes these days for) the retail sector.

In any case, the jury's out, but chart patterns such as the aforesaid could be auguring in all sorts of things if the H&S comes to fruition. Perhaps indirect participation in T-bond auctions is going to fall even further off the cliff and Uncle Sugar will need to scare yet more mom and pop "investors" into bonds. Perhaps a black swan event or two?

I also hasten to add that the two year H&S top is dwarfed by the H&S pattern that begins at the top in '00. That is what these jokers in corp/gov are fighting. They are battling the playing out of the mother of all H&S tops that projects to numbers one dare not speak.

With a newborn it is not as easy finding the time to read this forum as it used to be. :-) However, i will do a search on Desparado's writings as time allows.

Don't get me wrong. I believe there is no better place to be right now than the PM's. When the shtf I would rather own contraband PM's than worthless paper. I am not trying to be a wet blanket, but do often times fear the worst. As Andy Grove wrote, "Only The Paranoid Survive."

Can you see how each of those things have benefited those with political power?"

No, I can not see that (pls help me if I am blind).True, e.g. US government could be debt free for a split second, but afterwards? Do you think just to be debt free for a split second let the paradise come to the US? Just like Greece, doesnt matter to "forgive" all debt, in four years it's going to be the same.Do you think that by a miracle all Walmart stuff will be suddenly made in the US over night? How much time does the US have before they run out of gold (again?)?

With interest at 0% and bonds rolling over, the adding interest payment today is not the major problem anyway. So how do you think that just freegold would benefit the sudden dramatic pain evolving on the other side of freegold?

What freegold believers tend to underestimate is the social development during that transition.

Looking at the US, I have the impression that the regular people rather love to bomb, instead to work for their living, scary, yes? (without wanting to offend US citizens, and hopefully I am wrong).

Boy-oh-boy J ...the number of times I've thought "this is it!" over the last 12 Yr's ...and of course been wrong, probably exceeds a dozen however - each time, there is a justifiable "reason" for thinking so.Chicken little? ...well maybe a bit of that but otoh as I said, they are usually good reasons.

Can the system be cobbled together past mid-Feb '12? IMHO not without a "systemic distraction" of the magnitude of (say) a 911.

My current "Rubicon" is the Zero-Yield inflection point which will well-and-truly plumb the depths of negativity when the next Boil on the Sovereign Debt Carbunkle pops.

"The 'rich' are constantly being attacked by the regime. ... This is all the language of the left."

One thing to keep in mind is that the US does not truly have two political parties. As unpalatable as the thought may be, the Democrats and the Republicans are really two branches of the corporatists. Each is trying to appeal to different segments of the population, but the overall effect is one of robbing the middle class to buy off the poor, and maintain order so that the rich may become richer.

Think of it as a puppet show, where the mesmerized crowd is easy prey for the pickpockets.

While I agree with Wendy that your point of view echoes that of Desperado, I think your time would be better used searching out opposing viewpoints.

AdvocatusDiaboli,

"Let me check about the last major actions in recent history with major effects on (world wide) society:- minimum wages- US war on drugs- US war on terror- Obamacare- QE to infinity & TARP- ECB purchase of bonds- EFSF and upcoming ESM- tobin tax (it will come in the EU)"

I second Motley Fool's comment, and suggest that you look at the *actual* goal of said policies, instead of the stated objectives.

Who was it that commented on your perspective being vastly different? I forget.

To be honest this conversation is getting a bit tedious(though that may simply because I am tired after a long day's work).

I shall try.

- minimum wages - Useful on the social aspect of governments 'doing something' for 'the people'.

- US war on drugs - Two fronts. One, a populace that is free to use drugs are harder to influence and control. And. The USA in particular makes an insane amount of money selling illicit drugs to fund various black operations - take opium production in Afghanistan for example.

- US war on terror - Military industrial complex funding...need I say more.

- Obamacare - Social aspect of 'helping the people' whilst actually procuring forced funds for those in power and the medical lobby gravy train.

- QE to infinity & TARP - err. Keeps up the illusion of their working system...to the detriment of us all.

- ECB purchase of bonds - System maintenance.

- EFSF and upcoming ESM - System maintenance.

- tobin tax (it will come in the EU) - Hmm. Let's see this one happen first. ;)

I also see that in your blindness you do not grasp (yet) that the FreeGold system will be vastly different than our current one.

Will the US become a super-producer again overnight? No. But under FreeGold it will happen again, under the current system it is impossible. This is part of the pain that Freegold will bring...but it is a good pain, like having an aching rotten tooth removed.

The US populace does not want war, although I will concede that it looks that way at present. No human being (excluding psychopaths) wants war. War is hell.

Discussing the reasons for their current warmongering is a chat for a whole other book/post.

"Incidentally, in my view, the use of the term "quantitative easing" to refer to the Federal Reserve's policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, on a wider range of assets."

Yes, he has been explicitly clear the goal is not to pump up bank reserves and drive the money multiplier (despite the "OMG the money multiplier doesn't work" nonsense from the likes of utter clowns such as Keen and Mish).

Its not quantitative easing, as "securities purchases work by affecting the yields on the acquired securities," aka we need to do prop up the nominal pricing of debt instruments to keep the credit system functioning. BB calls it credit easing (aka life support):

"In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally."

The credit system is broke and we are printing money to buy securities to ensure nominal performance to allow the credit system to continue to function. Its not about pumping bank reserves to encourage more traditional bank lending, the game is structured fiance - its about propping up the securitized debt markets and big sovereign/corporate debt markets to ensure the nominal performance that the credit system needs to keep functioning."

================================ Also more comments from later in the thread about those who just keep blowing that much harder.

"I also see that in your blindness you do not grasp (yet) that the FreeGold system will be vastly different than our current one."

I think I absolutely clearly do understand a potential freegold system.But what I think, what some people ignore (intentional? cause doesnt fit their religion?) is the human behavior and bias, from the individual up to the government of that superorganism. I think that's what you do not grasp(yet).

You will not change that, just by saying "Woops, we just changed the accounting method, please understand now everythink is fine, cause we have a clean balance sheet for a new start."

P.S.What's also really lame is to blame other people with:"Oh, you just dont understand, listen to what the lord says", just to avoid the discussion.

P.P.S.If freegold would evolve, the US would be the very last place I would want to be on earth, that's for sure, no matter how much gold I would hold, or if it's taxed or not. And this is not a dislike of the US, I lived there long time ago and liked it.

"What's also really lame is to blame other people with:"Oh, you just dont understand, listen to what the lord says", just to avoid the discussion."

This had me smiling. You are quite correct.

My reply is simple. Something like the Gold Standard or the Real Bills Doctrine, does not take the human element into account; FreeGold does.

It realizes that there is a need to borrow and socialize losses, and accounts for this by having fiat as transactional currency/medium of exchange...it also sees the need to not have savings debased, and accounts for this by having gold as store of value.

I imagine that most countries in the world would be okay to live in, after we have had FreeGold for a while.

"But what I think, what some people ignore (intentional? cause doesnt fit their religion?) is the human behavior and bias, from the individual up to the government of that superorganism. I think that's what you do not grasp(yet).

You will not change that, just by saying "Woops, we just changed the accounting method, please understand now everythink is fine, cause we have a clean balance sheet for a new start.""

Doesn't it make sense that, if you change the incentives, then behavior would change?

I perfectly agree: Once there is a Freegold system established and balanced(!), it will help to let debtors and savers live in peace with each other (thank you FOFOA for that great post).

The point is the time of the transition. And that is my conviction, it will be really really ugly. And that pain can cause really stupid and contraproductive stages on the way (back to the topic: Tax?).

You might also take into consideration, that if the economy and/or society brakes due to the pain (because both are related), the purchasing power of gold even in Freegold might just be the one of today or even less, because everything else is burnt.

Don't conflate a recognition of the **avoidance** of the actual positions in discussion with blind devotion. There can be no showing of devotion if we can't get clear on what the devotion is allegedly directed towards!!

To point out that a characterization of an argument is a strawman, and thus to point out that a proposed conclusion does not follow because it flows from a faulty premise (a strawman) is not to avoid the discussion, its to **directly** engage the issue.

Its lame to keep avoiding the discussion! Engage it instead.

Confront the other side for what it is, not the imagined dragons and unicorns you believe them to be!

"The point is the time of the transition. And that is my conviction, it will be really really ugly. And that pain can cause really stupid and contraproductive stages on the way (back to the topic: Tax?)."

LOL, AD coming back on board and now restating FOFOA's position. Glad you can embrace the fact you are agreeing with what has been FOFOA"s position all along.

Yes, it will get bad, and yes, they will likely try everything they can to fight this inevitability. LDO that's the whole point- they will even kill the currency.

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So if the gold in private hands in the US doesn't flow in sufficient amounts, given that US debt has been discredited through the Freegold phase transition, the government will have no choice but to continue printing money in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people. And in a last-ditch effort to support its own failing currency, it will have to ship Fort Knox gold overseas. FOA mentioned something about this: "…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates."

In this scenario, the need to continue printing in the face of an ongoing currency collapse will obliterate any miniscule gain that comes from the few shrimps who actually decide to sell their gold in an untimely way and pay the tax. The US has precious little gold in private hands as it is. And it will need that private gold to flow. It needs you to sell your gold to your dealer so your dealer can export it to our trading partners. That's how trade flows will resume under the new paradigm, with savers choosing to let their gold flow because of the amazing purchasing power it delivers.

[...]

The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

Don't conflate the myriad of current political options the current issuer of the world's reserve currency has. These are largely marginalia reflective of the subjective value of the political deciders (aka tax the rich or stop welfare or whatever). A plethora of available options, largely constrained by politics.

This kind of stuff is not what we are talking about at all. Instead, we are talking absolute desperation post $ debt repudiation/$IMFs collapse/US hyperinflation. HI is the real deal kiddos, this no silly game. WAKE UP!!

Hi JR,My general point is: I think FOFOA is completely underestimating the length of the way and what will definitely happen on that way, just beliefing that reasonable decisions will be made. You say:

"that's the whole point- they will even kill the currency."

I know and thats what I am really scared of. Have you really deeply understood what that means for society, for the social human aspect?

Oh boy, I dont wanna cheer, when that happens, as I said, no matter how much gold I have, or how much I am convinced that a balanced freegold system would benefit for the people and the system.I am luckily living in Germany, supposingly private hands hold 5000m/t and increasing, few firearms, export surplus and for the social aspect "people are used to get screwed by the debtors, just love to work for salvation", so I assume it will not be so bad, still I am stacking as much food I can.

""On the other hand, gold and silver in the ground could face an entirely different treatment, but he seems to be saying that gold in the ground could be heavily taxed, whereas they would not be able to do so with silver because of the industrial demand. This made sense to me and suggests that silver miners are preferable over gold miners.""

I don't think the bolded is accurate."

That would be me.

You are correct, I mixed up what Jaqship said with what FOFOA said, however Jaqship has a good point. High silver prices have widespread adverse repercussions for industry that high gold prices largly don't share. FOFOA said that heavy taxation of gold producers is likely, whereas tax treatment of holders of physical is unlikely (in the long run) because the gold must flow. So how does this analysis apply to silver producers? Heavy taxation of silver producers will just run up the price of silver and make it even harder for the many US industries reliant on silver. This may stay the government's hand. So silver miners may be a tax safehaven whereas gold miners may see much of their profits taxed away.

I quite value the contributions of both of you (Motley's site is super!), but I must share the concerns of iceman and AD. To paraphrase Keynes' one (and only!) good quip, gov'ts can stay irrational longer than "investors" can stay solvent.What gov'ts do hinges on many things beside what seems most rational; like people, they use a complex cost-benefit "analysis".In the case of a post-Freegold super-tax on gold, much hinges on such empiricals as whether the US public holds enough gold for its export to substantially support trade flows.

The sort of folks who could get power during/after HI may be quite ruthless enough to resort to draconian means of squeezing out of the population (for years or decades) more wealth than would be obtained via the means FOFOA describes.This sort of thing happened 70+ yrs. ago in the place where AD lives. The technology of repression which a tyrannical bunch could use now probably dwarfs that which was available back in Adolf's day.

But does FOFOA or anyone think that people will be stupid enough not to take into account the interest rate when gold hits $2300 ? Gold at $2300 and interest rates at 0% is a totally different animal then gold at $2300 and 20% interest rates(10% real). You can always count on the people to be stupid so maybe they wont consider the interest rate. Makes me want to have some dry powder for this event. I would argue though, that we already had the 50% retrace in 2008. Gold was over 1000 when bear sterns collapsed in early 08 but then it went down to the 600 range later in the year.

I hope we are clear that the whole rational v. irrational dichotomy is a rhetorical strawman inserted into the debate by others. It was first brought up by iceman here.

FOFOA did not use these terms, and its clear why those who wish to discredit FOFOA continuously push these false distinction instead of addressing FOFOA's points.

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If you want to contend OMG look what these governments did in the past, you have to explain why things will be the same. A fundamental point about Freegold is it represents a change in the world's economic system. If you wish to argue things will be as they have been, you must 1) explain why you think Freegold does not entail change or 2) explain why the changes wrought by Freegold will not impact what governments did in the past.

Perhaps this is helpful (although some will miss the nuanced distinction). Its not rational v irrational, its acting in their best interest or not:

The long calm rational view recognizes that physical gold confiscation this time around is unlikely and illogical. Articles like the one you provided are suspect when taken in with this view. They are meant to add "gold angst", not to provide wealth protection advice.

"Won't the government using a variety of means, confiscate the gold or its profits thereof?" My short answer is no, because it will be acting in its own best interest. My long answer is co-mingled with many other subjects in the posts and comments on this blog. FOFOA comment

Rational v. irrational is perhaps a way to categorize the quality of the respective arguments, as FOFOA used it above, but it is not central to the arguments themselves. For obvious reasons many wanna conflate the recognition of "best interests" with "rationality," because its easy to pander to the LCD and go "G is not rational." But methinks those folks don't have a firm grasp on "rationality" what it means to be rational in this "context."

PAGE which stands for Pan Asian Gold Exchange was set up in 2011 and has already begun operations. Initially the scheme is open to the 320 million customers of the Agriculture Bank of China.

Eventually (June 2012) foreigners will also be able to trade the International Spot Contracts on PAGE online.

With PAGE the purchaser will receive a 90 days International Spot Contract with the actual title bearing the name of the purchaser. All transactions initiated either by a local or foreigner will be denominated in RMB. Investors are given a choice to take physical delivery or get paid in RMB.

What are the consequences when PAGE opens for international business in June 2012? At the moment, in order to influence the Gold price downwards, all that needs to be done by the authorities in LBMA and COMEX , is to raise the margin requirements.

End of manipulation of Precious Metals?

When the PAGE comes online internationally in June 2012, authorities at LBMA and COMEX will find that they can no longer manipulate the gold price by raising the margin requirements without the agreement of the Chinese.

The interesting point is what will happen to the price of Gold when LBMA and COMEX raise the margin requirement but on the other side the Chinese refuse to follow suit? This will cause a differential in the pricing of gold at both ends.

... due to the price differentials, the supply and demand factors will work its way through the markets and eventually the price of gold will converge or rather reach an equilibrium. Hence, it will be much more difficult to manipulate the gold market. Also by now most of us know that the leverage of both the LBMA and COMEX are more than 30 to 1. On the other end, the Chinese PAGE is 100% back by physical gold and it is guaranteed by the Chinese government. If investors realize that they are able to get physical delivery of bullion through PAGE, then who is going to do business with those fraudsters, criminal bankers and ponzi scheme operators in New York and London? Each morning at 8.00am, the price of gold will be set by six major Chinese banks.

Instead of letting the LBMA and COMEX set the price of gold, the Chinese will have the upper hand due to the time difference. by setting the opening price of gold to be traded in the morning, the Chinese indirectly set the international ‘benchmark trading price’ of the day.

As you recall, China has been promoting the ownership of gold among its citizens for the past two years. The Chinese government is keen to promote the sale of gold in the country and its effort has seen an increase in demand for gold by 27% last year.

China has taken over India as the world’s largest gold consumer, consuming about 91 tons which translates to about an increase of about 21% year on year.

Such a move to promote savings among the public is of vital importance.

One thing for sure is that PAGE is preparing the world for a Chinese World Reserve Currency, in this case the Renminbi.

Food for thought, imagine what will happen to the price when only 1 % of the Customers in Agriculture Bank of China (3.2 million) purchase one mini contract of gold and silver?

A 10 ounce Gold mini contract times by 3.2 million is equivalent to 32 million ounces of Gold and a 500 ounce Silver mini contract times by 3.2 million is equivalent to 1.6 billion ounces of silver. What will this do to prices of Gold and Silver?

A final note, this important development will definitely be the ‘Game Changer’ of things to come and definitely cannot be taken lightly."

There seems to be a point of view that freegold is somehow optional and radical, and that the USG can choose to control things with interest rates and tax laws. This is not the situation. JR is right when he says:

'This kind of stuff is not what we are talking about at all. Instead, we are talking absolute desperation post $ debt repudiation/$IMFs collapse/US hyperinflation. '

Those of you who can't envision the next step are stuck in the current paradigm.

FOFOA: As you can probably tell from this post, I believe that understanding Freegold requires a slight shift in your perspective. It is not sufficient for me to simply describe it in terms as they exist within our present financial and monetary paradigm. I know that some of you think I should be presenting a simple, fully articulated scenario. But I have tried this before. It does not work. It doesn't do a lick of good. It's not an easy task to explain something that requires a totally different point of view (before it actually happens; after it happens, of course, everyone gets it… but too late to act on it). My grandfather once taught me that anything in life that is really worthwhile will not be easy. This applies to Freegold.

Some of you have wondered why I am the only one talking about this. Why are none of the other well-known gold analysts acknowledging Freegold? Well, the reason should be self-evident. I am anonymously trying to share that which is easily ridiculed from within the current paradigm.

IMO the paper markets are extremely treacherous, and frankly, failing. I wouldn't keep my wealth in them, and I am just an ant. What would a giant do?

No silver bullet to avert another MF Global: regulator

(Reuters) - Increased surveillance cannot guarantee customers will never again lose money in a broker insolvency, though the collapse of MF Global Holdings may lead futures exchanges to conduct more spot checks, a top U.S. regulator said on Thursday.

Well, they won't be increasing surveillance from the present state of non-existent surveillance. And that comment about "may lead futures exchanges to conduct more spot checks" is just a downright howler.

At the moment, in order to influence the Gold price downwards, all that needs to be done by the authorities in LBMA and COMEX, is to raise the margin requirements.

This is complete and utter nonsense.

LBMA is a trade association and not an exchange and as such does not set any 'margin requirement'. The LBMA member firms are typically those banks and other financial institutions that trade gold and silver OTC in London, but non-members around the world also trade OTC with these institutions.

When Newmont has some trucks on the road on the way to the refiner, they might want to sell that gold immediately to eliminate any further price volatility from their accounts, and so they might phone JPM and sell that stuff forward. None of the two counterparties is a speculator here. Newmont does have the real stuff, and JPM does have the cash. So even if they would require collateral, this would not influence the price.

Yes, there are probably some raw recruits who follow websites such as TF and who trade COMEX futures in under-capitalized accounts. Yes, CME occasionally raises the margin. Yes, they may just be checking who is the under-capitalized novice and who really has the cash in order to purchase the gold for the contracts they hold. Yes, they may just rip off the clueless novice for fun (and money). But to think this would set the spot price of gold is quite a hubris.

The OTC market is ten times bigger than COMEX, and so it pushes COMEX around in a way that most COMEX-fixated goldbugs don't understand.

If you want to keep gold cheap in the long run, you need to create a huge volume of gold loans, expand the 'money supply'. If you want to manage the price of gold intra-day (and yes, there is indeed statistical evidence for this), you need to sell a lot of gold at spot in a short period of time. But you can do this only if you are a credible financial institution and only as long as you can hand over the allocated whenever your counterparties request it. So you need to understand extremely well what you are doing and how much physical per paper you need to be able to show. Hiking the COMEX margin is a side show.

What I find rather disappointing is the extremely poor quality of the discussion that is presented on the typical precious metal websites. This is financial product pushing of the same quality as pre-1999 when they IPO'd the companies that sell dog-food online.

Here are FOFOA, people discuss a very good reason for owning gold. For some reason, the mainstream goldbug websites totally ignore the good reason and push gold with inconsistent nonsense instead.

Why is that? Want to scalp PSLV? Want to create a mania, sell them financial products (including GoldMoney which is no longer 'money' by the way) and then when the big blackout comes, grab the gold for cheap from those who sell in panic because they never understood why they owned it in the first place? Very sad. And when the Financial Times calls the goldbugs confused idiots, sadly, there is even some truth in this statement.

Thanks for putting those comments by Stewart Thomson into a bigger context. I suppose it begs the question: will reality be allowed to intrude on these artificial constructs that we refer to as markets?

I imagine that the economic managers will continue to fight reality. And by their benchmarks for success (see JR's comments on Bernanke) they ARE succeeding LOL.

These differing TA perspectives could perhaps be resolved by drawing a distinction between nominal and reality adjusted performance.

I would prefer to see a resolution on OBA's time frame but I suspect we have a ways to go yet. A few cans unkicked, a few tinks untinkered....

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